October's moderation in inflation is welcome, but there remains a long way to go before inflation returns to a rate the Fed will tolerate. Weaker goods prices are merely the low-hanging fruit for getting inflation back on track. The torrid rise in goods inflation since COVID has reflected the unique aspects of the pandemic-driven shock, with the degree of price increases in weighty sectors like autos unsustainable. But the strength in services inflation will be harder to stomp out. While primary shelter prices have started to course correct, rent and owners' equivalent rent gains are set to remain elevated through next year. At the same time, labor-intensive services like medical care, education/childcare and personal care are experiencing strong upward pressure from the sharp rise in wages & salary costs over the past year or so.
Today's news on inflation is certainly welcome, and it reduces the likelihood of another 75 bps rate hike at the December 14 FOMC meeting. That said, the core CPI rose at an annualized rate of 5.8% between July at October, which is still much too high for the Committee's liking. It likely will be a number of months yet until the FOMC feels confident that inflation is indeed receding back toward its target of 2%. In short, we expect that the Fed policymakers will remain biased toward over-tightening rather than under-tightening for the foreseeable future. - Wells Fargo
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