Morning Market Brief: November 15, 2023

US inflation shows more signs of easing

The US inflation rate softened in October, reinforcing comments from the US Federal Reserve Board (Fed) that demand is moderating amid tighter monetary policy. The data shows inflationary pressures are coming down but there’s still more room to go, particularly as the Fed seeks inflation around 2%. October’s sharp drop in the US inflation rate could leave the Fed holding steady at its last meeting of the year.?

• The US inflation rate was 3.2% year-over-year in October, down from the 3.7% rate in September. A Bloomberg survey showed economists expecting a 3.3% annual rate in October.
• Downward pressure in the US inflation rate came from a drop in energy prices. Gasoline prices dropped by 5.3% year-over-year amid a decline in oil prices. Food and shelter, two critical components of inflation that have weighed heavily on US consumers, moderated in October compared to September.
• Core inflation, which excludes more volatile items such as energy and food, also eased in October. Core inflation was 4.0% year-over-year in October, down from 4.1% in September. Core inflation has eased in seven consecutive months.
• The drop in October’s inflation rate suggests the Fed’s aggressive policy tightening since 2022 is helping to slow inflationary pressures. While inflation has come down, it remains above the Fed’s 2% target, which gives way to the possibility of more rate hikes, per several Fed officials. However, October’s inflation reading raised expectations the Fed is close to done.

Despite coming down, we are clearly in an environment in Canada and the US of relatively high inflation and higher borrowing costs that might persist into 2024. This environment could cause some volatility in financial markets, but do not be deterred from continuing to save and invest. In equity markets, the volatility might provide plenty of opportunities in high-quality companies. In fixed income markets, as interest rates have the potential to level off, yields could eventually start to come down, which could benefit bond prices.

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