Inflation Cooled Off More Than Expected in November. Here's What It Means for Investors

Two days after investors received an employment report that showed the labor market continuing to wobble, investors got a key economic report with better news.

Inflation, as measured by the Consumer Price Index (CPI), rose 2.7% over the year through November, which was significantly lower than the 3.1% economists had forecast. Core inflation, which excludes the volatile food and energy categories, was up 2.6%, which was also below the 3.1% forecast.

The report is good news for investors, and stocks soared pre-market after the numbers came out with the S&P 500 (SNPINDEX: ^GSPC) up 0.9% at the open. Falling inflation combined with weak employment numbers makes it more likely that the Federal Reserve will continue to cut interest rates, which tends to push stocks higher. Lower prices are also a positive for the economy in general.

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Is rising unemployment reining in prices?

Still, the weaker-than-expected inflation numbers offer another potentially concerning data point. While slower inflation is a good thing for the economy and the 2.7% reading is moving closer to the Fed's target of 2%, inflation could be slowing because consumers are cutting back on spending.

There are plenty of indications that low and middle-income consumers are struggling, as job growth has been basically flat since April and consumer sentiment is down. Retail giants like Target and Walmart have talked about an "affordability crisis," and restaurant chains like Chipotle have noted a slowdown with younger customers.

Some companies are even lowering prices in response to weak demand. Pepsico said it would lower prices on some products to accelerate organic revenue growth. Meanwhile, there's plenty of evidence that consumers are trading down to cheaper items. Both Walmart and Dollar General are seeing more higher-income customers shop at their stores, a sign consumers are getting thriftier even with the stock market near an all-time high.

What it means for investors

Going into 2026, investors seem to be hoping for a Goldilocks economy, one where the economy isn't so weak that it leads to a recession, but isn't strong enough to keep inflation elevated. Ideally, for the stock market, inflation would continue to cool off, which would help the average consumer and could persuade the Fed to cut rates.

AI stocks are more insulated from the noise around employment and inflation data, but cyclical sectors of the economy are likely to be affected. If you own stocks in sectors like consumer discretionary, industrials, or financials, keep an eye on these economic reports in the coming months, as those stocks are likely to be sensitive to that news.

There's still a lot of uncertainty in the economy, but the next few rounds of reports could offer some much-needed clarity for investors.

Jeremy Bowman has positions in Chipotle Mexican Grill and Target. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Target, and Walmart. The Motley Fool recommends the following options: short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.