Why Are Markets Chasing "Pivot Talk"?

AT A GLANCE

• U.S. CPI inflation has moderated from 9.1% in June to 7.7% in October

• The labor market remains very tight, with average hourly earnings still growing by nearly 5% per year

Is inflation finally beginning to moderate? 

During the past year and a half, inflation has soared around the Western world. But finally, on Nov. 10, we got a piece of good news: U.S. inflation unexpectedly moderated in October, coming in 0.2% lower than expected. Markets rejoiced. Bond yields plunged, and equities rallied. 

The overall CPI inflation has now moderated from 9.1% in June to 7.7% in October. But much of the reason for the moderation in the overall CPI comes from energy prices, which have been falling in recent months.

Meanwhile, the story of core inflation is not so positive. Excluding food and energy, CPI slipped from 6.6% to 6.3% year-on-year. 

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The single largest component of inflation is housing, specifically rent and owners’ equivalent rent. And housing costs continue to soar, rising nearly 7% year-on-year. 

The labor market is slowing but remains very tight, with average hourly earnings still growing by nearly 5% per year. But even with the economy back to full employment, employers are still looking to hire an additional 10.7 million workers – far more than they were looking to hire pre-pandemic. 

As such, it may be slightly premature to celebrate a moderation in inflation. 

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