The economy giveth, and the economy taketh away. Today’s update on consumer prices for November showed it clearly in the giveth mode, offering a refreshing volte-face from yesterday’s disappointing news on the trade deficit.

Today is all about better-than-expected news of CPI dropping by the most in a month since July 1949. The consensus forecast was calling for a drop of 0.4% in last month’s CPI, reflecting the pullback in energy prices. In fact, the decline in consumer prices was much steeper, registering a 0.6% fade. Energy led the retreat, shedding 8% in November, helping the energy-dependent price gauge for transportation to fall a hefty 4.9%. Whether this is sustainable is debatable, but for now there’s only cheers.
The bond market hardly needs more incentive for predicting that the Fed’s cycle of interest-rate hikes is nearing an end. Needed or not, that view of money markets got a large boost of momentum with this morning’s CPI news. But if the Fed is tightening the price of money primarily to slow the housing market, central bankers may be inclined to keep on keeping on. Indeed, housing prices rose 0.5% in November, according to the CPI report–the second-highest monthly rise in 2005 after October’s 0.9% jump.
To be sure, the government’s measure of housing costs in the CPI report is driven by rental prices, which is flawed because it only captures of portion of what’s going on in real estate generally, namely the buying of houses at higher prices. Nonetheless, higher rental costs feed into higher real estate costs.
But such sniping will be lost in today’s celebration of a CPI update that, at least for one month, has given the markets a reprieve from the annoying talk of inflation. Indeed, the stock market, measured by the S&P 500, is pushing into new recent highs, and today’s CPI report should help cement the trend for the remainder of the month and on into January. Meanwhile, the bond market seems inclined to pare rates, again, with the 10-year Treasury yield building downward momentum of late.
Christmas, in sum, may come early this year.