US inflation in October lower than expected

US stock markets and government bonds surged Thursday on news that US consumer prices increased by 7.7% in October, down from 8.2% in September.

Investors are speculating that the lower-than-expected inflation figure will temper further planned interest rate rises by the US Federal Reserve. Economists had forecasted an 8% CPI increase for October.

Interest rate hikes in the US are adopted by banks in Cayman and passed on to borrowers and depositors. Recent increases have made debt servicing locally much more expensive, pushing up prime mortgage and loan rates for businesses and consumers.

The 7.7% US inflation reading was the lowest 12-month increase since January.

The energy index increased 17.6% for the 12 months ending October, and the food index increased 10.9% over the last year.

Core inflation, excluding the more volatile food and energy, equally trended below the forecasts reaching 6.3% last month, down from 6.6% in September.

The US is Cayman’s largest import market and US price changes are typically reflected in local consumer prices with an added mark-up for shipping costs.

In the second quarter of this year, the latest available figure, Cayman consumers faced a record inflation rate of 12.1%.

To fight inflation, the US central bank has increased its policy interest rate six times this year, by a total of 3.75 percentage points, with a further hike expected in December.

At a press conference announcing the latest increase earlier this month, Fed chairman Jerome Powell said to slow rate hikes, “We do need to see inflation coming down decisively and good evidence of that would be a series of down monthly readings.”

But to determine whether the level of interest rates is sufficiently restrictive, other data would come into play to assess how much financial conditions have tightened, he added.

Nevertheless, financial markets now expect the Fed Funds rate to peak at 4.8% in May 2023, down from a previous estimate of 5% in June 2023.

Currently, the benchmark policy rate is in a target range of 3.75-4%.