US shares and bonds surge as inflation hits lowest level since December 2021

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US stocks and government bonds surged after consumer price inflation fell more than expected in November to its lowest level in almost a year, bolstering the Federal Reserve’s plans to slow the pace of interest rate rises.

The rate of increase in the consumer price index (CPI) fell to 7.1 per cent last month, lower than the 7.3 per cent forecast by economists and down from 7.7 per cent in October. It is the lowest level since December 2021.

Overall CPI rose 0.1 per cent from the previous month, less than the 0.4 per cent increase in October.

The S&P 500 rose 2.6 per cent and the Nasdaq Composite leapt 3.6 per cent shortly after Wall Street’s opening bell, as investors bet that the US central bank might not have to squeeze the economy as aggressively as feared to bring inflation under control.

The yield on two year US Treasury bonds, which is sensitive to changes in interest rate expectations, slid 0.22 percentage points to 4.18 per cent as the price increase.

The dollar shed more than 1 per cent against a basket of six peers. It has drifted lower in recent weeks, but an index tracking the US currency is 8 per cent higher for 2022 — buoyed by the Fed’s aggressive rate rising campaign.

The inflation report, released by the Bureau of Labor Statistics on Tuesday, came at the start of the Federal Open Committee’s final two-day policy meeting of the year.

On Wednesday, the US central bank is set to raise its benchmark policy rate by half a percentage point, breaking successive 0.75 point interest rate increases.

With Wednesday’s expected increase, the federal funds rate will move up to a new target range of 4.25 per cent to 4.5 per cent, which most officials believe is still not high enough to bring inflation back down to the Fed’s longstanding 2 per cent target.

“One [inflation] number won’t be enough for the Fed, but it certainly is going to put the Fed in a better mood than they have been over the past number of weeks,” said Padhraic Garvey, regional head of research for the Americas at ING. But he warned that inflation could “quite easily” surprise next month.

“The sensible thing from [the Fed’s] perspective is to deliver the [half-percentage point move], do it in a hawkish manner and don’t have a victory lap just yet,” Garvey said.

“If they go all dovish tomorrow, the market will read that and will loosen up financial conditions further and it just takes away the value of the hike in the first place.”

Energy and goods prices have begun to slow this year, having previously helped to push up the annual increase in the CPI index to 9.1 per cent in June. But services-related costs have risen at an alarming pace, bolstered in part by an acceleration in wage growth as a result of the surprisingly resilient labour market.

In November, housing-related costs were the biggest driver of the monthly increase in consumer prices, rising 0.6 per cent compared to October and 7.1 per cent on an annual basis. Home prices have fallen materially this year as mortgage expenses have jumped, but those declines take time to show up in the data, suggesting further downward pressure on inflation next year.

Both transportation costs and those related to medical services posted monthly declines, despite having increased 14 per cent and nearly 5 per cent compared to November last year. Food prices remain elevated, however, registering a 0.5 per cent monthly increase.

Fed officials have acknowledged that getting inflation under control will require a sustained period of low growth as well as higher unemployment, but have stopped short of forecasting an outright recession. Most economists say an economic contraction will be necessary and anticipate a mild one next year.

Additional reporting by Harriet Clarfelt in New York

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