Drop in US Inflation Brings Relief to MarketsDropinUSInflationBringsRelieftoMarkets

The surge in US inflation showed signs of abating in October, driving down the market’s expectations for interest rates on Thursday. The consumer price index was up 7.7% over the previous 12 months, which remained historically elevated but marked the slowest annual rise since January. It was also a bigger drop than economists had forecast from the 8.2% reading in September, as energy and food prices rose at a slower pace. Following the report, investors raised their bets that the Federal Reserve will deliver smaller rate hikes of 50 bps in December and 25 bps in February, according to interest rate futures.

Meanwhile, the balance of power in Congress tilted in favor of Republicans in midterm elections on Tuesday, setting the stage for a divided government in Washington. If Republicans take control of one or both chambers of Congress, President Joe Biden will face an uphill battle in seeking legislators’ support for his agenda, stalling potential efforts to pass new spending that would likely stoke inflation fears.

New research from PGIM Fixed Income looks at the strains pressuring global supply chains and the outlook for inflation. While signs point to a moderation in US prices as demand cools and supply improves, Russia’s invasion of Ukraine and COVID-19 lockdowns in China continue to pose significant challenges for Europe.