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After prices rise less than expected, markets soar on hopes of lower inflation

Markets saw their biggest one-day rally since 2020 as investors hoped the October data would lead the Fed to ease rate hikes

Prices of consumer goods have been rising all year. (Nitashia Johnson for The Washington Post)

Inflation stayed high but showed signs of slowing in October, spurring new optimism on Wall Street, even as families and businesses still face rising costs for basics such as food and rent — and as the Federal Reserve ramped up its efforts to lower consumer prices, even at the risk of forcing a recession.

Prices rose 7.7 percent in October compared with the year before, and 0.4 percent over September, the same rate as the previous month, according to data released Thursday morning by the Bureau of Labor Statistics. That’s far above normal levels, but it was lower than analysts had expected.

The markets rallied on hopes that inflation may have peaked. At Thursday’s close, the Dow Jones industrial average soared nearly 1,200 points, or 3.7 percent. The S&P 500 rose 5.5 percent, and the Nasdaq climbed 7.3 percent. The indexes clinched their biggest one-day rallies since 2020.

The report brought some hope that the soaring cost of living may be easing. Officials at the Fed have made clear that they need to see months of encouraging data to get a sense of how the economy is evolving. The latest data may mark a shift, but they’ll want to see it continue.

“This was good news, but I wouldn’t dramatically change my view of the world based on one data point. We’ve had false dawns before,” said Jason Furman, an economist at Harvard University who was a top economic adviser to President Barack Obama. “One should feel better about inflation today than one felt yesterday. Just not much better.”

Tech stocks, which have taken a beating as interest rates have gone up, turned around Thursday, with Apple and Microsoft both rising more than 8 percent. Manufacturers also got a boost on investor hopes that the economic outlook is improving — Boeing and 3M gained 5 percent and 4 percent, respectively.

October marked the smallest 12-month increase since the period ending in January, and progress looked different through the report. Some categories dropped notably: Prices for used cars and trucks fell 2.4 percent, airfares 1.1 percent and apparel 0.7 percent. In other pockets of the economy, prices were still climbing but at a slightly slower pace than the month before. For example, food was up 0.6 percent in October, after rising 0.8 percent in September.

“This morning’s [consumer price index] data were a welcome relief, but there is still a long way to go,” Dallas Fed President Lorie Logan said in a Thursday speech. And Mary Daly, president of the San Francisco Fed, said Thursday that “7.7 [percent] is not price stability.”

Indeed, policymakers and economists won’t be celebrating just yet. The shelter index made up more than half of the monthly increase, as high rental costs remain despite a recent slowdown in the housing market. Rent was up 0.7 percent compared with the month before, a small ease from September. But overall, rent is up 7.5 percent over the year.

Gasoline prices also rose 4 percent over September, after three months of consecutive declines. Gas is up 17.5 percent over the past year, largely because of Russia’s invasion of Ukraine and the sanctions the West has imposed on a major oil producer. Other oil-exporting nations are also cutting back production.

Voters in Tuesday’s elections told exit pollsters that inflation was among the most important issues swaying their choice, and nearly half of voters said jobs and the economy were the most pressing issues facing the country.

In a desperate bid to get prices down to normal levels, the Fed is raising interest rates at its most forceful pace in decades. A growing number of economists and Democratic lawmakers say they’re concerned that the Fed will end up slowing the economy so much that it causes a downturn next year.

How the Fed’s rate hikes slow the economy — and impact you

In the past year, inflation emerged as a fraught political issue in the run-up to the midterm elections. Republicans were hoping to make major gains in Congress by attacking Democrats’ sprawling spending measures from earlier in the pandemic, arguing that trillions of dollars in government funds helped push the economy into overdrive. But although control of Congress is still undecided, the issue appears not to have driven anything like the backlash the GOP was seeking.

Post reporters Damian Paletta and Rachel Siegel explain how economic downturns begin. (Video: Hope Davison, Drea Cornejo/The Washington Post, Photo: Michael S. Williamson/The Washington Post)

So far, the labor market has remained hot and has proved remarkably resilient amid the highest inflation levels in 40 years. But that could change if employers start nixing their plans to hire new workers — or lay people off altogether. Already, Silicon Valley is taking a hit, with major companies shedding workers in recent weeks. Facebook parent company Meta announced plans Wednesday to cut more than 11,000 jobs, or 13 percent of its workforce, and is extending its hiring freeze through March.

But for more than a year, officials have taken everything with a dose of skepticism, especially since the data can be noisy and offer seemingly contradictory snapshots of the economy.

Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office, encouraged patience yet again. The good news, he said, is that overall year-over-year inflation fell below 8 percent for the first time since February. The bad news is that shelter costs remain high, and there isn’t enough evidence yet that the Fed can start to loosen its policies.

“There’s no dramatic disinflationary trend that’s in the data,” he said. “We’ve just sort of been bouncing around an unpleasantly high plateau for months.”

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Getting control of inflation is the Fed’s job, and the central bank’s power lies in interest rates. Higher rates cool off demand in the economy by making all kinds of borrowing — from mortgages to business loans — more expensive. Last week, the Fed hiked rates for the sixth time this year, announcing a fourth consecutive hike of 0.75 percentage points. Officials have already said the central bank will raise rates again in December — possibly by 0.50 percentage points, now that rates are high enough to start slowing the economy — and continue tightening policy into next year.

“The Fed will be comfortable with [half a percentage point], knowing they can go another half-percent,” said Diane Swonk, chief economist at KPMG. “That’s not a big step down. They’re still tightening. It was never a pivot.”

Fed Chair Jerome H. Powell emphasized last week that his colleagues were a long way from finished. He conceded that it had become “harder to see the path” to avoiding a recession, so long as rates stay higher for longer.

Where’s the economy headed? To quote the Fed chief: ‘Hard to say’

An interest rate hike will affect anyone with a home mortgage, car loan, savings account or money in the stock market. (Video: Daron Taylor/The Washington Post)

A major question is whether prices can be tamed with rate hikes alone. The Fed’s decisions can’t fix certain sources of inflation, like bungled supply chains, worker shortages or Russia’s war in Ukraine.

In Lansing, Mich., Jerry’s Automotive is still having issues getting enough engines and transmissions in stock. Owner Chris Luoma said he can only absorb so many costs, and he tries to be honest with customers about the supply chain issues that have long dogged the car market, saying that “you’ve got to stay open, stay in business and pay the bills.”

Fed chief sees narrower path to avoid a recession in inflation fight

Luoma said his shop made it through the pandemic in part because people had a cushion of savings they could use to pay for repairs and they often didn’t want to hunt for a new car. The shop has been around for over 50 years, and Luoma hopes it’ll make it through the uncertainty ahead. People always need their cars fixed, after all.

“While a recession might make us step back and think … we’ve seen peaks and valleys with the economy,” Luoma said. “And we’ve always managed to be okay.”

With the latest batch of inflation data, analysts and Fed officials are likely to pay special attention to rental costs, which make up a large portion of what economists refer to as the “basket of goods” used to calculate what’s known as the consumer price index.

But the hope is that, eventually, a major slowing in the housing market will pull rental costs down, too. The housing market is the main part of the economy that has responded to the Fed’s rate hikes, since mortgage rates are especially sensitive to the central bank’s decisions. The average rate for a 30-year fixed mortgage, the most popular home-loan product, reached 7.08 percent in late October.

As a result, home prices are falling, demand for mortgages is plummeting and, in October, builder confidence fell for the 10th month in a row.