Concerns of an impending stock market crash are swirling ahead of the October Consumer Price Index (CPI) report, due Nov. 14. The crucial inflation data should offer telling insight into the state of U.S. prices as well as the Federal Reserve’s path forward.
Next week’s CPI report is expected to show easing month-over-month inflation, in no small part due to falling oil prices. Indeed, oil prices have been sliding since early October, with Brent Crude currently selling for about $80 per barrel. Not only is this a rapid decline from the nearly $95 level from October, it’s the lowest price since August.
According to the Cleveland Fed’s Nowcast tool, the CPI is expected to increase at 0.07% in October, a notable decline from September’s 0.4% reading. Meanwhile, core inflation, which ignores food and energy prices, is expected to increase by 0.34% month-over-month, roughly in line with last month. This should put overall inflation between 3% and 4%, well below peak levels but notably above the Fed’s 2% inflation goal.
Will the CPI Report Trigger a Stock Market Crash?
Should the Cleveland Fed’s prediction come to pass, the Fed may be a bit disappointed by relatively stagnant core inflation. Indeed, the Fed’s 2% inflation goal applies not only to headline inflation but to core prices as well. In that regard, there is a bit more work to be done.
If you recall, while headline inflation rose 3.7% for the year in September, core inflation remained a bit more elevated at 4.1%. If little progress is made in next week’s report, this may be a hawkish indicator to the Fed.
The central bank is currently in the midst of a pause on its rate-hike process. Should the Fed get too impatient or unsatisfied with the deflation process, it may opt to continue raising interest rates at its upcoming December rate-hike decision.
Higher interest rates tend to slow economic growth, something investors are increasingly wary of. As such, expect the stock market to respond to next week’s CPI report in potentially surprising ways.
Should inflation ease more than estimated, expect traders to buy stocks, assuming the Fed will hold rates steady next month. If inflation comes out higher than predicted, traders may sell equities, assuming that the Fed is likely to increase the benchmark rate come December.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
