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How is the inflation decrease affecting the stock market?

US stock markets, which have made strong gains over the past year, got another boost this week on the back of new data showing inflation’s continued easing.

Stock markets up as inflation falls
Lucas JacksonREUTERS

The US Bureau of Economic Analysis released its latest data on consumer inflation on Thursday showing that it continues to cool. The Commerce Department reported that prices were unchanged from September to October, compared to a 0.4 percent increase the month before.

Headline inflation year-over-year fell to 3 percent, putting the Personal Consumption Expenditures (PCE) index at its lowest point in two and a half years. The core PCE index, without volatile food and energy prices, dropped to 3.5 percent in October from 3.7 percent the previous month.

How is the inflation decrease affecting the stock market?

The latest inflation data was good news for investors as the PCE is the preferred index for policymakers at the Federal Reserve, who had until recently been implementing aggressive rate hikes to bring inflation back to their target of 2 percent. Investors now see it ever more likely that the Fed is done with raising the cost of borrowing, with the prospect that policymakers could start cutting interest rates by the middle of 2024.

The result helped put even more wind in the sails of markets, which have made tremendous gains in 2023, helping them finish their best month of the year. The Dow rose 8.8 percent, the S&P 500 gained 8.9 percent and the Nasdaq swelled 10.7 percent last month.

Optimism US will avoid a recession

There is optimism as well among economists and market analysts that the US will most likely avoid a recession and rapid growth in unemployment that have historically followed aggressive rate hikes. The Fed raised interest rates from near zero in March 2022 to their highest level in two decades, hiking rates 11 times.

While the labor market appears to be softening with the rate of unemployment rising to 3.9 percent, the data shows that it is still strong. Other economic data on consumer confidence and economic growth have aided the sentiment that the Fed will pull off the ‘soft landing’ that it has been aiming for, where inflation eases back to its target without throwing the US economy into a recession.