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Economic and Market Commentary

October CPI: Small Surprise, Large Market Reaction

U.S. inflation cooled more than expected, and bond markets rallied, but the Fed is likely to remain in a long pause.

October’s U.S. Consumer Price Index (CPI) release likely reinforced the Federal Reserve’s resolve to pause as the effects of tighter monetary policy continue to work through the economy. Indeed, core U.S. inflation cooled more than many observers expected, rising just 0.23% in October. This wasn’t far below consensus, yet the welcome surprise sparked a meaningful immediate rally in bond markets. It was also good news for Federal Reserve policymakers, who may now be more comfortable with the prolonged pause they’ve signaled.

October’s U.S. data for both inflation and employment align with our view that growth momentum and inflationary pressures are fading. In this “Post Peak” economy (as we discuss in our latest Cyclical Outlook), cracks are beginning to appear in the U.S. resilience that bolstered growth and pressured term premia through much of this year. However, we still believe that a period of below-trend growth is likely necessary to bring inflation sustainably back to the Fed’s 2% target. The bond market rally following the CPI data release suggests investors are increasingly mindful of the shifting macro trends.

October CPI details

The main drivers of softer inflation for the month include owners’ equivalent rent – a gauge of what homeowners could charge for rent – which came in lower after a surprise reacceleration in September, while rental inflation remained steady. Travel prices remain volatile, surprising to the downside in October. Core goods prices fell, due in part to retail discounts in some categories, along with softer new and used car prices. Energy prices dropped notably, contributing to a flat reading for headline CPI in October.

By contrast, medical services, including health insurance, saw prices rise in October; food prices also edged higher.

Softer inflation and payrolls support Fed on hold

At their latest meeting in November, Fed officials signaled a prolonged pause, and seemed to set a higher bar for future rate hikes amid contractionary monetary policy and tighter financial conditions. Softer October inflation data, plus the uptick in unemployment, are consistent with the slower pace of U.S. activity Fed officials have been expecting.

The Fed remains focused on price stability. While the path to lower U.S. inflation is likely to be volatile, we see two reasons why inflation risks may be more balanced in the medium term. First, goods inflation could continue to cool as China exports some of its deflation to the U.S., retail consumers turn increasingly price-sensitive, and auto prices keep dropping. Second, despite an extremely resilient and rising market in homes for sale, we see some downside potential in the coming months in the market for rents – and it’s rents that are measured in U.S. inflation reports. Supply of rental units has been rising in several regions, which could put downward pressure on rents in 2024.

The CPI report wasn’t all good news for the Fed. Inflation remains sticky in key areas of particular interest to policymakers: Core services ex shelter are up at a 4.9% annualized pace over the past three months. The persistent stickiness in these wage-sensitive areas reaffirms our view that despite the significant progress on inflation, the labor market still needs to cool for the Fed to be successful in returning inflation to 2%. We expect the Fed will be patient and keep policy at restrictive levels until it seems clear inflation is well on its way toward target.


A surprise softening in U.S. inflation following an uptick in unemployment are signals that bond markets seem to be receiving – namely, that U.S. economic resilience appears finite, and in an environment of post-peak growth and inflation, fixed income offers potential for attractive returns and resilience in the event of a downturn.

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