The new CPI report is due Tuesday, and a softer-than-expected inflation would likely propel US stocks further in the following days.

The Consumer Price Index (CPI) data for October 2023 is set to be released on Tuesday, with many expecting a dip in the headline inflation rate due to declining energy prices. A softer-than-anticipated report would likely boost US stocks, which have recorded a winning streak over the past week. 

Analysts Optimistic About US Stocks Ahead of October Inflation Data

More often than not, positive consumer price index (CPI) reports that displayed a drop in inflation have acted as a catalyst for the markets, especially equities, over the past year and a half. And according to analysts, the upcoming one due on Tuesday could be one of these.

The headline annual inflation rate for October is expected to display a continued drop in inflation, mainly due to moderating energy prices. According to FactSet, the overall CPI is projected to hit 3.3% in October, down from 3.7% a month earlier. 

This, in turn, could emerge as a significant catalyst for stock prices. Analyst Tom Lee said inflation would need to reaccelerate to negatively impact the stock market. Conversely, a softer-than-anticipated CPI report would likely fuel a rally in stocks and bonds. 

“I’d say the setup looks pretty favorable,” Lee said. “I think the reaction function is changing for the stock market,” he added. 

Fed Expected to Keep Rates Unchanged in December, but Possibility for New Hikes Remains

Meanwhile, economists expect core inflation – a measure that leaves out volatile food and energy costs – to remain sticky. In particular, core CPI is estimated to stay above September’s levels, with a 4.1% jump from a year earlier.

As such, analysts and investors will closely monitor October’s report to get more insights about the Federal Reserve’s next policy and interest rates decision. Nevertheless, many market participants largely believe the central bank will keep rates at their current levels at its December meeting. 

However, it doesn’t confirm that the Fed’s rate-hiking campaign is over. Last week, Fed Chair Jerome Powell hinted at the possibility of more rate raises and warned about being “misled by a few months of good data.” 

“If it becomes appropriate to tighten policy further,” Powell said, “we will not hesitate to do so.”

The Fed has been hiking interest rates 11 times since March 2022, bringing its key federal funds rate to a target range of 5.25-5.5% – the highest since 2001. However, the central bank hasn’t imposed any new hikes since July 2023 but switched to the so-called ‘higher for longer’ rate narrative. 

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