“Santa is coming after all,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Fortune. “Given the better-than-expected inflation data this morning…markets have a green light to rally into year end.”

Inflation, as measured by the consumer price index (CPI), rose 7.1% from a year ago in November, the Bureau of Labor Statistics reported Tuesday. 

While investors normally wouldn’t be happy to see inflation that’s more than 5 percentage points above the Federal Reserve’s 2% target rate, this time is different. November’s report was the smallest 12-month increase in consumer prices since Dec. 2021. And it came in below investment banks’ forecasts for year-over-year inflation of 7.3%.

“This was a very good CPI report and will help cement the view that inflation has peaked and prices are now on a disinflationary path,” Raymond James’ chief economist Eugenio Alemán, told Fortune.

Throughout 2022, Fed officials have raised interest rates six times to fight inflation, and experts Fortune interviewed agreed the Fed would add another 50 basis point hike this week.

But Rick Rieder, BlackRock’s chief investment officer of global fixed income, said the latest inflation report provided “some signal that the underlying trend of inflation is decelerating,” which could lead the Fed to “pause” its interest rate hikes at some point over the next few months. Morgan Stanley’s chief U.S. economist Ellen Zentner echoed Rieder’s comments in a Tuesday research note, saying that the latest inflation report is “welcome news for the Fed.”

If the Fed does pause its rate hikes, or pivots to rate cuts, it would provide a runway for stocks that have been held down by rising borrowing costs.

“Inflation is easing and the Fed is on track to downshift the pace of rate increases,” Jeffrey Roach, chief economist for LPL Financial, told Fortune. “In the near term, investors should respond favorably to these encouraging moves.”

A look under the hood of the latest CPI report

Both headline inflation and core inflation—which excludes more volatile food and energy prices, and is more closely followed by Wall Street—surprised economists in November.

Core inflation rose 6% from a year ago last month, compared to 6.3% October, as declining used car and medical care prices helped reduce the index’s gains.

Medical care costs dropped for the second consecutive month in November, falling 0.7%. And used car prices sank for the fifth straight month, leaving them down 3.3% from a year ago.

Headline inflation also rose just 0.1% month-over-month and 7.1% from a year ago in November, as the high energy prices that have driven consumer price increases for over a year are now fading. Although energy prices were still up 13.1% from a year ago in November, they dropped 1.6% on a month-to-month basis, and oil prices are now down over 35% since June.

Food prices were still a big driver of headline inflation in the U.S., however. Total food prices jumped 0.5% in November from a month earlier and 10.6% from a year ago.

Despite the recent decline in U.S. home prices, shelter costs continued to rise in November as well. But Raymond James’ Alemán said that trend should end soon.

“Inflation was very low even as shelter prices continued to increase,” he said. “We expect shelter prices to start weakening in the coming quarters, which will add to the disinflationary pressures going forward.”

Another bright spot in the latest CPI report was the deceleration in services prices, LPL Financial’s Roach said. Total services prices, which make up roughly 60% of the CPI, rose 0.3% from a month ago in November. That’s the smallest monthly increase since July.

Economists have been closely watching services inflation as consumers shift their spending from goods to services like travel as pandemic restrictions fade globally.

Not so fast

While many economists and investors are celebrating the inflation’s recent downtrend, others warn the road ahead could be bumpy for the U.S. economy and stocks.

“While Tuesday’s report showed a deceleration in inflation, which is great news, inflation is still very elevated and is over three times greater than the Fed’s 2% target, so this isn’t time for the Fed to take a victory lap,” Nancy Davis, founder of Quadratic Capital Management, told Fortune.

Davis, who also serves as the portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL), said it’s possible inflation will remain well above the Fed’s 2% target all of next year.

“The market seems to think the inflation fight is almost over, and we don’t believe that confidence is warranted,” she said. “The pace at which the market expects inflation to decline seems very optimistic.”

Most investment banks aren’t forecasting a great year for stocks in 2023 either. Morgan Stanley sees the S&P 500 trading down to 3,900 next year, versus 4,000 today, while Goldman Sachs and Bank of America are both expecting the blue-chip index to end the year at 4,000.

The S&P 500 spiked over 2% on Tuesday morning after the latest inflation report was released, but has since given back most of its gains. 

For investors, the positive inflation report could be a trap, Gina Bolvin, president of Bolvin Wealth Management Group, told Fortune.

“While today’s numbers show a good trend, investors shouldn’t overreact,” Bolvin said. 

“The last time the market rallied over softer inflation data, we experienced the Jackson Hole jolt, where Powell pushed back and reiterated hikes,” she added in a reference to Fed Chair Jerome Powell’s hawkish comments at the central bank’s annual symposium in August that left markets reeling.

Still, some experts argue that inflation is now all but defeated, which means avoiding a recession is now possible, despite consistent doomsday predictions from Wall Street. And that should benefit stocks.

“Today’s report suggests we’re on the road to a soft landing,” David Russell, vice president of market intelligence at TradeStation Group, told Fortune. “The Fed will keep talking tough…But we seem to have turned a corner on inflation. Santa could be coming to town this year.”