US Inflation Cools Sharply in October, But Sustainability Questioned

US CPI Misses Forecasts, Triggering Massive Risk-On Rally

October's US consumer price index rose 7.7% year-over-year, down from September's 8.2% and below the 7.9% consensus estimate. Core CPI, which excludes food and energy, increased 6.3% YoY versus 6.5% expected. On a monthly basis, headline CPI rose 0.4% and core CPI 0.3%, both below forecasts.

The S&P 500 surged 5.5% and the tech-heavy Nasdaq jumped 7.3% on the day, marking the best single-day rally since 2020. The dollar tumbled, and the 10-year Treasury yield dropped 30 basis points to 3.82%. Check current prices.

What Drove the Surprise Disinflation? And Why It Might Not Last

Goods Deflation and Medical Care Costs Provide Temporary Relief

The downside surprise was largely driven by a 0.9% drop in used car prices and a 0.5% decline in apparel. Medical care services also fell 0.6% month-over-month, likely reflecting a seasonal adjustment quirk. Core goods prices declined 0.4% MoM, the first drop since May 2020.

However, shelter costs continued to rise, with owners' equivalent rent up 0.5% MoM and 6.9% YoY. Services inflation ex-shelter remained elevated at 0.5% MoM. These components are stickier and less responsive to Fed rate hikes.

Labor Market Tightness and Wages Keep Core Pressures Alive

The jobs market remains historically tight, with unemployment at 3.7% and average hourly earnings rising 4.7% YoY. Wage growth in labor-intensive services like leisure and hospitality is fueling persistent demand-side inflation. The Fed has repeatedly emphasized that services inflation ex-housing is the key metric to watch, and that remains elevated.

Used car prices could rebound as wholesale auctions show recent increases, and medical care costs may normalize. The disinflation from goods may be temporary as supply chain improvements fade.

Key Levels to Watch: S&P 500, Dollar, and Yields

The S&P 500 broke above its 200-day moving average for the first time in months, now eyeing resistance near 4000. A sustained move above that level could open the door to 4100. The dollar index (DXY) fell below 108, with support at 106. The 10-year yield's drop below 3.85% is significant; a break below 3.5% would signal a major shift in rate expectations. For traders, these levels are critical for risk management. Use technical indicators to confirm breakouts.

What This Means for Traders: The Fed's Dilemma and Market Pricing

The market is now pricing in a 50-basis-point hike in December, down from 75 bps before the data. But the Fed has cautioned against reading too much into one report. Chair Powell recently said the terminal rate may be higher than previously thought. If core services inflation remains sticky, the Fed could still deliver a 75 bps hike or signal a higher terminal rate at the December meeting.

For traders, this creates a two-way risk. The immediate rally may extend, but the Fed's next move could disappoint. Positioning is extremely one-sided long risk assets, raising the risk of a sharp reversal if next month's CPI or payrolls data surprises to the upside. Join the discussion in signal rooms to see how others are positioning.

Beginners should note that such sharp rallies often lead to volatility. It's crucial to have a plan and use proper risk management. If you're unsure about your trading style, take our quiz to find your approach. To trade these moves, you'll need a broker account — compare options at brokers.