Inflation slowed more dramatically than expected last month, finally easing what had been a heated 18 months of quickly rising prices. This is a promising sign that the Federal Reserve may not need to initiate another rate hike. Yes, the rate hikes might have seemed small, but over time, consecutive three-quarter percent increases add up.
This is the kind of inflation-softening news both consumers and investors alike have been waiting for, and they will be watching closely as the Fed concludes its two-day meeting this week. Should they refrain from another interest rate hike, prices from food to cars to airfare should moderate and, hopefully, even wind down a bit.
The Fed had been aggressively raising interest rates this last year, arguably in an attempt to combat inflation. This incremental reduction could bring rates to a slightly more favorable range of 4.25 to 4.5 percent. Officials at the central bank are also expected to release economic projections indicating how much they expect interest rates to increase next year. Investors seem poised on quarter-point raises, starting at their February meeting.
Stock prices leaped at this news, particularly the government data indicating that inflation had eased to 7.1 percent over 12 months through November. While this is still markedly high, it is far better than the 7.7% from the previous rating. More importantly, it is far better than economists were expecting. With that, the S&P 500 closed up approximately 0.8 percent.
In addition to the stock market, the bonds market also rallied on the news. Specifically, the two-year US Treasury bond yield—perhaps the most sensitive to interest rate modulation—eased by 0.22 points to 4.18 percent. Eventually, it managed to get down to trading at around 2.24 percent.
All of this led to lower rate increases across the board. For example, the Consumer Price Index (CPI) rose only 0.1 percent in the month and only 7.1 percent in the year. Previous respective estimates were notably higher, at 0.3 and 7.3 percent. As a result, core CPI increased only 0.2 percent in the month and 6 percent in the year, compared against 0.3 and 6.1 percent, respectively.