Is Inflation Truly Whipped?

Last week’s consumer price index report showing inflation — at least by some measures — had slowed in October to its lowest level since the beginning of the year set off a massive rally in stocks and bonds.

But is the market overreacting, and does the report necessarily imply that inflation has finally and truly peaked and that the Federal Reserve is just about done tightening? It may be a little too early to declare victory.

The report was at least encouraging, certainly, but whether we’re home free or not remains to be seen. The headline CPI rose 7.7% compared to a year earlier, down from September’s 8.2% pace and the smallest year-on-year increase since January.

The core index — which excludes food and energy prices — rose by 6.3%, down from the prior month’s 6.6% pace. But the monthly increase in headline inflation was 0.4%, unchanged from September.

Did all that justify a 5% jump in the NASDAQ last Thursday and the sharpest one-day drop in bond yields in more than 10 years, with the yield on the benchmark 10-year Treasury note falling to 3.83% from 4.15%? (The bond market was closed Friday for Veterans Day.)

If you believe Wharton professor Jeremy Siegel, who has been saying for months that the Fed is seriously overcounting inflation, then last Thursday’s massive rally was justified.

Not only did he tell CNBC that “inflation is basically over,” but that “we’re in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they’ve been using.”

Siegel specifically cited the cost of housing and rent, which he says are overinflated in the data the Fed uses to set interest rate policy. Once the Fed sees the light, he says…

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