What to Believe about Inflation?

It depends on which trend you follow.

The release today of “good” news about inflation sparked a huge stock-market rally. The S&P 500 is up by more than 4 percent as I write this.

How good was the news? The year-over-year change in the CPI-U for the 12 months ending in October 2022 was “only” 7.75 percent, down from 8.20 percent for the 12 months ending in September 2022. Both rates are below the recent peak of 9.06 percent for the 12 months ending in June 2022.

On the other hand, as an economist might say, there’s bad news in the month-to-month inflation figures. After the peak in June, prices dropped slightly in July and August: -0.14 percent and -0.42 percent, annualized. But prices rose again in September and October: 2.61 percent and 4.98 percent, annualized.

The October jump is — or should be — of concern to the Fed. Today’s stock-market exuberance may turn out to be irrational.