US Inflation Rate Falls to 6.5%

Price pressures are continuing to ease as the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s successfully cools off demand and supply chain bottlenecks are starting to get resolved.

Consumer-Price Index, the most important measurement of consumer spending, increased at Its slowest rate since October 2021, according to the Labor Department, December’s annual inflation rate is down from a 7.1% print in November and significantly lower than the 9.1% peak in June.

Core CPI, which excludes volatile energy and food prices, rose 5.7% in December from the previous year, slowing from a 6% gain in November. Many economists view the increase in core CPI as a more reliable indicator of future inflation compared to the overall CPI. Additionally, the annualized rate of core prices increased at 3.1% in the last three months of December, which is the slowest pace in over a year.

On a monthly basis, CPI Decreased by 0.1% in December. The decline is attributed to a significant drop in energy prices. This is in contrast to a 0.1% Increase in November and 0.4% Increase in October. Moreover, Food Price Increases also slowed in December. Core CPI rose by 0.3%, higher than November’s 0.2% Increase but lower than the 0.6% Increases seen in August and September.

The CPI print sparked total chaos across markets as expectations that inflation is finally under control lead investors to fuel an explosive — but short lived, rally.

The question now is what will Powell make of all of this, and until we get the answer early next month, the fact is that powerful one-day market rallies are not what the FED wants to see.

Despite the fact that inflation is cooling off, things are not as great as those who celebrate the imminent Fed pivot are claiming. According to Black Rock’s recent 2023 Global Outlook report, “the firm expects central banks to eventually back off from the rate hikes as the economic damage becomes a reality and inflation cools off, [but] they forecast inflation to remain persistently higher than the central bank’s target of 2%.”

Source: https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2023.pdf

Road ahead

Although we have gotten material evidence that the peak in inflation might be in, Investors should be careful not to over-extrapolate these results and temper their expectations of a premature pivot from the Fed.

Inflation, after all, is still high and far from the Fed’s price stability goals. The 1970s provide a clear example as to the risks of claiming victory on inflation too early and Powell is well aware of the risks that long term secular inflation would pose for the U.S and the global economy overall.