CPI inflation data rocks stocks

Goldilocks. That’s probably the best way to describe it. Investors, including me, were fearing the worst: a Fed hamstrung by its dual employment and inflation mandate, unable to make the necessary changes to rates to keep the U.S. economy from stalling.The November CPI inflation data released today may change that in a big way. It removes much of the angst caused by this week’s unemployment report, which showed the U.S. unemployment rate increased to 4.6% in November, its highest level since 2021.According to the Bureau of Labor Statistics, prices increased just 2.7% year-over-year in November—far less than the 3.1% inflation Wall Street expected.The slowdown is the first since April, before most of President Trump’s harsher-than-expected tariffs were put in place. In September, inflation, as measured by the Consumer Price Index, spiked to 3% from 2.3% this spring.CPI by month (2025)November: 2.7%October: N/A (No reading due to government shutdown)September: 3%August: 2.9%July: 2.7%June: 2.7%May: 2.4%April: 2.3% Source: Bureau of Labor Statistics. With inflation receding, the Fed’s mission to support the jobs market is an unequivocal “go,” providing plenty of revenue and profit growth opportunities for publicly traded companies that could allow stocks to continue their impressive rally.Still, the data isn't without problems, including a major one surrounding what isn't inside the report.Stocks lead, not lagStocks move up and down based on the future, not the past. They don’t rise or fall in a straight line, but generally, the stock market declines months before economists declare recession and rallies long ahead of them signaling all clear. CPI inflation came in cooler than expected in November, causing stocks to rally.REUTERS Despite rising unemployment and inflation since spring, the stock market has given investors little to worry about since April, when President Donald Trump paused most reciprocal tariffs to facilitate negotiations, kickstarting a nearly 30% rally that has lifted the benchmark index’s return to 15.5% year-to-date.The gains follow back-to-back 20% plus returns in 2023 and 2024, and this year’s performance yet again outpaces the average 10% return delivered since 1950.The market’s message has been clear: Corporate profits will climb despite higher import taxes.The driving force: A friendly Fed.

The Federal Reserve sat on its hands this year until rising unemployment forced its hand in September. Since then, it has cut its Fed Funds Rate, or FFR, by a quarter percentage point at three consecutive FOMC meetings, including on December 10.The Fed doesn’t control bank lending rates on credit cards, autos, and mortgages, but the FFR is the rate at which banks lend each other reserves overnight, so it does influence them. It also influences the Treasury bond yields used by banks to set rates and by companies as the risk-free hurdle rate when evaluating new projects.The lower the FFR, the lower lending rates generally go, and the more profitable capital projects become, fueling revenue and profit growth – the lifeblood that dictates the direction of stock prices.In short, earnings have trumped inflation as the market has assumed any inflation caused by tariffs will be a temporary spike.For perspective, few, again, including me (and I’ve been in this field for decades), guessed that corporate profits at S&P 500 companies would surge as much as they have this year. According to Factset, revenue rose 8.5% and earnings rose 13.6% year over year in the third quarter.As a result, valuation has improved markedly in the past couple of months, with the S&P 500’s forward price-to-earnings ratio, or P/E, dipping to 22.5 from nearly 24. Currently, Wall Street analysts are modeling 14.5% earnings growth in 2026, according to FactSet.Inflation falls for the first time in monthsTariffs were rolled out more gradually than feared, and rates fluctuated as negotiations progressed. As a result, companies have taken a measured approach to them, offsetting some of the hit by forcing supplier concessions. The rest of the tariff impact has either been absorbed on the bottom line or slowly passed along to consumers in the form of higher prices.As a result, inflation has slowly crept higher as more companies worked through early-year inventory and began passing along higher costs to consumers. In April, the CPI was 2.3%. It rose steadily, reaching 3% in September.Related: Cooling jobs report resets Fed interest-rate cut betInflation's rebound prompted worry over stagflation - a period of slow growth and rising prices. Or worse, concerns over outright recession. The rise in the unemployment rate fed that narrative... until now.The November drop in the CPI to 2.7% was unexpected. Wall Street was broadly expecting it to click a little higher, with consensus estimates calling for it to be 3.1%. The core CPI, which excludes volatile energy and food, also edged lower than economists projected, coming in up 2.6%. Wall Street was forecasting 3%.Wait, not so fast -- where's the data?Lower inflation is excellent news because it helps remove the risk that the Fed will be boxed into a corner, unable to lower rates. However, investors need to be cautious, given the numerous data fields left unfilled in the November inflation report. Key categories were left blank due to the inability to collect data caused by the government shutdown, including food, shelter (rent/owner equivalent rent), and energy (although gasoline was included).The drop in inflation, therefore, has a big, bold asterisk. See for yourself: PERCENT CHANGES IN CPI FOR ALL URBAN CONSUMERS (CPI-U): U.S. CITY AVERAGE Source: Bureau of Labor Statistics.The zeroes in the report have drawn a fair share of pushback from market watchers, including on X, formerly Twitter, where most have focused their attention on the all-important shelter components.

Navy Federal Chief Economist Heather Long wrote:Economist Omair Sharif of Inflation Insights wrote:The shelter component represents about one-third of the CPI index, so the inability to provide data for it has an outsized impact on inflation overall, and likely represents the main reason for the lighter-than-feared inflation print.So should you discount these numbers outright?Not necessarily. The shelter components are notoriously laggy because rents only reset annually for most renters. Real-time data shows that rents are falling faster than the shelter components of the CPI have suggested, which may mean that, while this data is suspect on an apples-to-apples basis, it still provides insight into how the CPI may have evolved anyway.Director of Research of John Burns Research & Consulting, Rick Palacios Jr. wrote:"Regardless of the rent/OER methodology issues in today’s CPI, we know from our trackers and surveys the rental market is struggling. Very weak decelerating new lease growth, which will help keep a lid on inflation well into 2026. Not the best demand story, but if inflation is the lens you care about, directionally, shelter disinflation is for sure happening." Average rents have been increasing at a slower rate in 2025.Zillow/TheStreet The key takeaways:Headline CPI came in at 2.7% in November, below the 3.1% estimate.The core CPI was 2.6%, below the 3% estimate.Missing data raises questions about the reliability of November's inflation report on an apples-to-apples comparison basis.Shelter and rent components account for one-third of the CPI, and missing data had an outsized impact on the decline in inflation.Real-time market trends for shelter have been falling faster than CPI models were suggesting until now.Investors should consider this CPI reading bullish for Fed rate cuts, but with an asterisk.Related: Fed cut backfires as mortgage rates climb and demand slumps