The dream economic scenario might be back on the table, as inflation cools and growth surges

• US inflation cooled to just 3.2% in October, per Tuesday's Consumer Price Index report.
• Stocks surged after that data was released, while several Wall Street banks issued cheery forecasts.

Inflation cooled off in October – and that's fueled hopes from Wall Street to Main Street that the US economy may be headed for the best outcome possible after nearly two years of worry.

Stocks surged after the release of the Consumer Price Index report Tuesday, while benchmark 10-year Treasury yields pressed ahead with their retreat from 5% in a sign that the worst of last month's bond-market meltdown could be over.

Meanwhile, top firms from Bank of America to PIMCO issued cheery forecasts, arguing that the drop in inflation lays out a path for the Federal Reserve to start aggressively slashing interest rates next year.

After a difficult few months, there are signs the central bank's dream economic scenario is back on the table once again.

Inflation cools

Tuesday's CPI report showed that inflation rose 3.2% year-on-year last month, coming in softer than the 3.3% figure that economists polled by Reuters had been expecting.

It's the first time since June that inflation has fallen, after a third-quarter flare-up in housing and gas costs had briefly pushed the rate back up toward 4%.

Since March 2022, the Fed has jacked up interest rates from near-zero to around 5.5% in a bid to clamp down on soaring prices. The October CPI report is the clearest sign yet that the central bank will now be able to call time on that tightening campaign and start cutting borrowing costs next year.

Bank of America analysts said in a research note Tuesday that inflation cooling in October would end up being "the straw that broke the hiking cycle's back", while PIMCO's chief economist Paul McCulley called the data a "gamechanger".

Both the S&P 500 and the Nasdaq Composite surged 2% after the inflation print, while bond yields, which move in the opposite direction to prices, fell.

If the Fed looks at the October CPI report and decides to stop tightening, that'll be good news for the US consumer too – because lower borrowing costs filter through to other products like mortgage rates, which have surged north of 7.5% in recent months.

The dream economic scenario

Some big-name investors sounded cautious in their responses to the latest data, warning that inflation may prove stickier than expected.

JPMorgan CEO Jamie Dimon said now was not the time for a Fed victory lap because rapid price rises "may not go away that quickly", while billionaire Citadel founder Ken Griffin warned the central bank would lose credibility if it started slashing rates too soon.

But for the optimist, inflation cooling is terrific news.

In July, Business Insider's Matt Turner laid out what he called the "dream scenario for the economy" – where the Fed is able to bring inflation down to its 2% target without dragging down growth or crushing the job market.

All the evidence from the past few months suggests that's still achievable.

The US economy surged in the third quarter, with the country's Gross Domestic Product (GDP) jumping 4.9%, powered higher by a massive increase in consumer spending. So-called "funflation" was one factor behind the expansion, with Americans flocking to big live events like Taylor Swift's "The Eras Tour" and the "Barbenheimer" box-office craze.

And while the unemployment rate has ticked up slightly in recent months, it's still hovering south of 4% – in a sign the US labor market is proving far more resilient to the Fed's rate hikes than many had expected.

Some might call this a "Goldilocks" scenario – where inflation, growth, and the job market all look "just right". Others would say the Fed is closing in on a "soft landing", because it has reined in inflation without fueling a massive surge in unemployment.

Whatever you call the ideal economic outcome, it's now one step closer to becoming a reality.