Annualized US inflation fell from 7.1% to 6.5% over the past month. Month-on-month, the US CPI decreased by a marginal 0.1%, having increased by the same figure between October and November.
There was less positive news for core inflation – a basket that excludes food and energy - as it rose by 0.3% last month and is stubbornly high at 5.7% in the year to December.
The shelter index was the dominant factor behind the rise, as it surged by 0.8%, a figure that was equaled by the rent index, which increased month-on-month by 0.2%.
The CPI data was a perfect match for what was widely anticipated by many market analysts, as research from Dow Jones found that the consensus was for a 0.1% inflation decrease on monthly basis, but a 6.5% annualized increase.
The peak high of US CPI on an annualized basis during 2022 came in June, at 9.1%.
Overall, the fall in annualized inflation will serve as a tonic to the markets, but it is still much higher than the Fed’s 2% target.
Food for Thought for the Federal Reserve
The latest inflation data may encourage the Federal Reserve to decelerate its course of interest rate hikes.
However, the minutes of the last Federal Open Market Committee released last week indicated its hawkish stance is highly likely to continue, even though the last hike in December 2022 was only 0.5%, compared to earlier recent hikes which were 0.75%.
The Fed’s next interest rate decision will be made on 1st February.
The United States 2-Year Treasury yield fell, by 0.1%, down to 4.12% in the aftermath of the announcement of the data, after having climbed to 4.25% just before the CPI data was released.
This may signal that the pace of rate hikes will indeed be slowed now.
Nigel Green, the CEO of the deVere Group reflected: “The data confirms that inflation is finally being tamed, which means there is a higher chance that the Federal Reserve will pursue less aggressive interest rate hikes in the world's largest economy. The news is fuel for the markets, although core inflation, which excludes food and energy, and which is seen as a better signal than the headline measure, is still well above the Fed’s target.”
Food Increases but Energy Decreases
Food prices again increased, placing further pressure on consumers, having risen by 0.3% in December, the same amount as the previous month.
Three of the six major grocery store food group indexes increased over the month, as meat, poultry, fish, and eggs prices increased by 1%. Fruit and vegetables saw a decline in prices by 0.6%.
Overall, the cost of food has risen at a very high annualized rate of 10.4%.
There was better news about energy prices, as they dropped by 4.5% in December, which was a bigger fall than the monthly fall of 1.6% that was seen in November’s inflation figures. This was spearheaded by a considerable 9.4% fall in the price of gasoline. However, natural gas prices increased month-on-month by 3%, having seen a monthly fall of 3% in November, while electricity also increased by 1%.
In total, energy costs have risen by 7.3% over the past year.
Dollar Falls Against Major Currencies Stocks Trade Sideways
Following the data release, the US Dollar fell against the British Pound, the Euro, and the Yen, as markets come to believe the Fed will go easier on rate hikes.
The biggest mover in the Forex market was the USD/JPY currency pair, which traded as low as ¥129.50, its lowest rate seen since June 2022. The EUR/USD currency pair made a new 8-month high at $1.0838.
The US CPI data release seems to have been fundamentally significant, reinforcing belief in the long-term trend in the two major Forex currency pairs, which will encourage traders to look to be long of the Euro and the Japanese Yen against the greenback.