Falling U.S. inflation boosts stocks and boosts hopes of a soft landing for the economy

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U.S. inflation cooled again in November, giving hope that the Federal Reserve has engineered a soft landing for the world's largest economy and sending stocks closer to a new record high.

The S&P 500 rose 0.2 percent after federal data showed prices rose more slowly than expected in November, putting Wall Street's benchmark share gauge within 1 percent of an all-time closing high reached in January 2022.

The index has posted eight straight weeks of gains — a feat last accomplished in 2017 — and is on track for its third-best 12-month year in a decade.

„There is mounting evidence that the post-pandemic inflation scare is over, and we expect interest rates to be cut significantly next year,” said Andrew Hunter, economist at research firm Capital Economics.

President Joe Biden hailed Friday's report from the Bureau of Economic Analysis as a „significant milestone” in efforts to return inflation to its pre-pandemic levels.

„As we head into the holidays, the prices of essential items, including a gallon of gas, a gallon of milk, toys, appliances, electronics, car rentals and airfare, are down from a year ago,” Biden said.

The BEA released November's core PCE inflation reading — a measure favored by economists because it strips out volatile energy and food prices — rose just 0.1 percent for the month, less than expected.

The figure brings the six-month annualized rate down to 1.9 percent, slightly below the central bank's official 2 percent inflation target.

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The latest drop in so-called core inflation comes a week after the central bank surprised markets by signaling that it would start cutting interest rates next year, earlier than expected in 2023.

„When the Fed becomes proactive, it puts investors in a positive mood,” said Tim Murray, capital markets strategist at T Rowe Price. „We got a rally as a result, and it's hard to argue with that.”

Futures markets are now pricing in bets that the Fed will cut interest rates six times in 2024, lowering its target rate to 5.5 percent from the current 22-year high of 5.25 percent.

A dovish mood on Wall Street combined with a low US unemployment rate has led to predictions that the economy is now on a soft landing after inflation forced the central bank to raise rates to levels expected to trigger a recession.

While the latest gross domestic product data showed the U.S. economy expanded at a 4.9 percent annual rate in the third quarter, rate-setters and economists now expect growth to slow slightly in 2024.

According to statistics, the US is the world's strongest performing major economy, posting faster growth and sharper declines in price pressures than most European countries. The central bank is widely expected to cut rates before the European Central Bank or the Bank of England.

Americans are becoming less gloomy about the economy as the 2024 presidential election approaches, boosting Biden's election prospects.

Consumer sentiment rose 14 percent in the past month, according to a closely watched University of Michigan poll, pointing to increased confidence among people that the worst inflation in a generation is behind them.

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Fifty-five percent of respondents now expect their incomes to rise at least as quickly as prices in the coming year, up from 49 percent in October.

„Sentiment increased across the population, with increased sentiment among consumers of all ages, incomes, education levels, political affiliations and regions of the country,” Michigan's report said.

There has been some improvement in inflation since the sharp fall in US gasoline prices in recent months, pushing average prices to their lowest level since the summer of 2021.

While the numbers cheered Wall Street, Citi economists cautioned against an overly optimistic interpretation of the data, saying prices in the service sector were still rising quickly.

„Core inflation remains weak due to strong commodity inflation. This may keep key metrics soft in the coming months, but is not a sustainable way to get inflation back to target,” said Andrew Hollenhorst, the bank's economist.

He also warned of risks that could destroy the outlook, such as disruptions to global trade through the Red Sea, where Houthi rebels have fired missiles and drones at merchant ships.

Fed rate-setters expect to make three rate cuts next year — a sharp reversal for central bank officials who have insisted for months they will not begin easing monetary policy until they are certain inflation has been defeated.

Additional reporting by Jaron Kerr in New York

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