Hello. My name is David Lebovitz. And I'm a global market strategist at JP Morgan Asset Management. Welcome to On the Minds of Investors. This week, I'd like to talk a little bit about the October inflation report.

After months of surprising to the upside, the October CPI report came in below expectations with the details painting a picture of receding inflation pressures across various sectors of the economy. Headline inflation rose by 4/10 of a percent over month, and core inflation rose by 3/10 of a percent month over month, bringing the annual rates to 7.8% and 6.3%, respectively. Over the past year, the inflation surge has been a tale of three waves-- energy inflation, core goods inflation, and services inflation.

After declining for three consecutive months, energy inflation rose in October due to a bounce in gas prices. But this was partially offset by declines in utility prices. Meanwhile, food inflation is cooling but still elevated, particularly as the food away from home category continues to reflect higher wages and resilient demand in the restaurant industry.

On the other hand, core goods showed evidence of further disinflation aided by the unclogging of supply chains and softer consumer demand. After many months of declines in the Manheim Used Vehicle Index, used car prices fell by 2.4% in October and was the largest drag on CPI. That said, services prices had been putting upward pressure on the aggregate inflation figure during the past few months. But this dynamic may be gradually starting to turn.

Importantly, core inflation excluding shelter fell by 1/10 of a percent last month, posting its first decline since May 2010. As wages continue to cool and pent up demand for services softens, we expect this inflation wave will continue to moderate. The Fed is determined to see inflation recede, and we're likely going to need more than one good report to convince them that this is, in fact, happening.

However, they may still be inclined to watch whether this improving inflation trend persists. As such, we expect the Fed to hike rates by 50 basis points in December. But continued evidence of disinflation may allow them to slow the pace further to 25 basis points in February. However, before we rejoice, there's still a question of whether the Fed will allow its policies to work their way through the economy as there is still a risk that they knock the economy into a recession to combat an inflation problem that, based on this report, seems to be receding on its own.