Inflation report shows market could have a ‘recipe for disaster’ heading into new year, says economist

So far on Wednesday, the stock market was largely ignoring the morning’s inflation report because the main CPI reading was as economists expected. But a look deeper into the report spells trouble for a stock market (and President elect) that are going to want the Federal Reserve to keep cutting rates throughout next year to keep fueling the bull market. “The economy is not slowing down and core inflation is not cooling down, and with the threat of import tariffs from the new administration in the year ahead, this is a recipe for disaster where the deflation trend in core commodities prices could turn around in a heartbeat,” wrote Chris Rupkey, chief economist at FWDBONDS. The October consumer price index released Wednesday morning suggested the battle against inflation is far from over, just nearly one week after Federal Reserve Chair Jerome Powell expressed confidence that pricing pressures is heading toward the central bank’s 2% target. The problem lies with core inflation, a measure that excludes volatile food and energy prices, that the Fed has historically put more emphasis on as it is a better indicator of long-term trends. However, in recent months, policy makers have focused more on the headline number, saying shelter costs, which have an outsized influence on core CPI, will come down. But core inflation has remained unusually stubborn, suggesting the Fed may have to hold rates higher than investors were previously anticipating. Core CPI showed a third straight monthly increase of 0.3%, bringing the annual rate to 3.3%. “Three months in a row for 0.3% core monthly CPI changes cannot be music to Fed officials’ ears because it shows the job is not done yet,” wrote Rupkey to clients after the report. Complicating the picture is the return of Donald Trump to the White House, as tariffs and other fiscal policies the president-elect promised on the campaign trail are expected to support growth but also exacerbate inflation. Markets are now pricing in less than four quarter percentage point rate cuts over the next year, though a December quarter-point cut remains on the table, according to the CME FedWatch Tool . If stubborn inflation causes the Fed to halt its rate-cutting campaign, it could cause a lot of indigestion on Wall Street and in Washington D.C. — CNBC’s Jeff Cox contributed to this report.