Hello, my name is Stephanie Aliaga and I am a research analyst at J.P. Morgan Asset Management, with a message on what you need to know about the October inflation report, what this means for the Federal Reserve and how this affects the outlook for a soft landing.

October CPI came in below expectations with headline inflation unchanged month over month, and core inflation rising just 0.2%. This brings their annual rates down to 3.2% and 4.0% before seasonal adjustment.

At first glance, this is a very favorable reading, but we think the underlying details show an even better picture on disinflation progress, with the pockets of warmth in this report unlikely to be sustained, and the overall trend consistent with an economy on track to return to the Fed’s 2% inflation target by the end of next year.

So let’s walk through each of the main inflation blocks: energy, core goods, shelter and core services.

First, the summer surge in energy prices is reversing with gas prices down 5% this month, and this contributed to a particularly soft headline inflation reading.

We also saw disinflation in a broad range of goods such as clothes, furniture, school supplies and toys—and it’s worth emphasizing that this source of inflation has already been squeezed out of the economy. This month marked 5 consecutive monthly declines in core goods prices, as indicators like the ISM delivery times index show supply chains have fully healed from the pandemic and are now even better than they were in 2019. So heading into this holiday season, retailers should have little issue with getting products onto the shelves. Elsewhere, car prices continued to fall despite concerns around the impacts of the UAW strike, and new car still have to catch up to the declines we’ve seen in used car prices.

Shelter prices also resumed their decline and this measure still has a long ways to go. Owner’s equivalent rent, which is the bulk of this component, is a very lagged and slow-moving measure, but more current data on rents from Zillow show prices have come all the way down from an annual peak of 16% last March to 3% as of October.

So that leaves us with the rest of services inflation, ex-housing and energy, an area of particular focus for the Fed. Auto insurance is still having an outsized impact, and health insurance will likely become a mild upward driver in the year ahead after being a consistent drag this year. But overall, we forecast that the PCE core services measure rose a modest 0.2% this month, and I don’t think the Fed will be too concerned with that.

And sticking with the Fed, we still think they are done hiking for the cycle. Combined with a soft payrolls report earlier this month, there’s little argument for inflation pressures warranting another hike. But the Fed also isn’t ready for the markets to begin pricing in rate cuts, as they are now, so its likely they will maintain their hawkish commentary despite progress in the data.  

Going into next year, all the ingredients for a soft landing souffle are still on the table. Labor markets are healthy but easing, the consumer is strong but becoming a bit more pennywise, and financial and credit conditions have held up remarkably in the face of significant monetary tightening. If the economy can maintain this balance, markets could sustain a holiday rally and long-term interest rates could decline further, supporting both stocks and bonds.

Well thank you for listening. For more of our insights on the economy and investing you can check out our mobile app “Insights” by J.P. Morgan Asset Management.

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