The stock market has gotten hit hard throughout 2022, and inflation has played a big role in the bear market. The Nasdaq Composite (^IXIC 1.59%) has been hit the hardest out of major market benchmarks, and many high-growth stocks have lost huge portions of their value over the course of the year.

Yet all that seemed to be a thing of the past on Thursday, as the Nasdaq jumped more than 6% at midday. The move higher came after the latest reading on the Consumer Price Index (CPI) indicated a slowdown in price increases over the past year. Yet when you look more closely at the actual inflation numbers, it's far from clear that investors should consider the problem solved.

What investors focused on

The CPI report released this morning showed that the index rose 0.4% on a seasonally adjusted basis during the month of October compared to September's level. With that move, the CPI has risen 7.7% over the past 12 months. As high as that is, it marks the lowest year-over-year increase since January 2022, and it was lower than the 7.9% year-over-year figure that most economists had expected to see.

Rolls of currency, stacked to go up and to the right.

Image source: Getty Images.

As we've seen numerous times before, food and energy prices were volatile and contributed to inflationary pressures. Energy in particular reversed its recent losses, rising 1.8% on a nearly 20% jump in the cost of heating oil and a 4% rise in gasoline prices. Food prices rose 0.6% on a 0.9% rise in costs for food away from the home.

Excluding those food and energy numbers, core inflation rose 0.3% for the month and 6.3% year over year. Used vehicles and apparel costs continued their monthly decline, and healthcare costs also fell. Continued increases in shelter costs and transportation services kept the inflation rate higher than investors had wanted to see.

Do these numbers warrant a Fed pivot?

It was far from clear in light of the CPI report whether investors would see it as a reason for the Federal Reserve to pivot from its current policy trajectory with respect to interest rates. Admittedly, 7.7% is down from peak year-over-year figures above 9% from earlier this year. However, it remains stubbornly far above the 2% target that the central bank has historically maintained.

Yet market participants seemed to use comments from a pair of Federal Reserve officials as an excuse to start a massive stock rally. Philadelphia Fed President Patrick Harker expressed his view that the central bank would likely slow the pace of further increases in interest rates once they become adequately restrictive on economic growth. Similarly, Dallas Fed President Lorie Logan expressed relief at the downward move in the year-over-year CPI, but indicated that there was still a long path ahead for inflation to weaken further before central bankers can treat price pressures as having been defeated.

Moreover, investors recognized that the Fed will actually get another data point on inflation before it has to make its next decision on interest rates. Because Fed meetings come at roughly six-week intervals, the CPI figures for November will be available before the next potential hike. If next month's CPI confirms what this month's figures said, then it would be more powerful evidence for the central bank at least to consider making smaller increases in interest rates than the three-quarter-percentage-point hikes it has used four times in a row now.

Hope for the best

The extent of the move higher in the Nasdaq shows just how worried investors have been about inflationary pressures. A one-day pop in stocks, though, won't in itself be a victory over inflation. Future data will have to support a positive trend in order for the markets to build on Thursday's gains.