US stocks rallied in November, fueled in part by better-than-expected inflation data early in the month. The S&P 500 recorded its biggest one-day gain of the year, rallying 5.5% on November 10th, following the Bureau of Labor Statistics’ Consumer Price Index (CPI) data release. While inflation remains, markets celebrated continued indications that inflation is easing. The chart below shows three broad inflation categories: durable goods, nondurable goods, and services, in addition to the overall CPI. Notice the dramatic slowdown in goods inflation in recent months, which has led to the overall slowdown in inflation. Investors also have reason to be optimistic about a continued slowing in services inflation following October’s decline. Shelter is the largest services category, and while it has continued to climb, the CPI’s calculation methods can cause the data to lag asking rents currently offered in the market. Real estate firm Redfin finds that median rents have been declining in recent months1; a stark contrast to 2021 and early 2022.
Macroeconomic theory says lower deficits work against inflation and the current fiscal policy (the use of government spending and tax policies to influence macroeconomic conditions) framework is likely to continue to apply downward pressure on inflation in the year ahead, particularly in a divided government. The nonpartisan Congressional Budget Office’s 2023 fiscal year projection, based on the President’s Budget, is for the annual deficit to be $467 billion lower than 2022’s actual deficit2,3. Stocks mounted another large rally following Fed Chairman Powell’s speech on November 30th, essentially confirming a step-down in interest rate increases in December to a 0.50% hike vs 0.75% in the last four Federal Open Market Committee meetings. As CPI data has improved, and the fiscal and monetary policy frameworks currently in place work against inflation, optimism regarding a potential end for this inflationary regime is well founded. Still, investors need to remain vigilant to any supply shocks or major policy shifts that may allow for higher inflation to persist. The monthly CPI data releases will continue to be the most-anticipated data releases for the foreseeable future.
-Jared J. Ruxer, CFA, MS