US inflation declines only slowly, Fed cannot be satisfied

These are undoubtedly the beliefs of some investors, who ignore slight increases in annual inflation rates because they believe the downward trend will continue. That means that markets are in a risk-on mode.

The Core Consumer Price Index (Core CPI), which increased by 0.4% MoM in January as predicted, is the most significant statistic. This is a slight improvement over the 0.3% in December, but it is still well below the high 0.6% levels recorded in mid-2022. Underlying inflation for the year is at 5.6%, exceeding expectations but falling short of the level seen in December.

The headline CPI, which fell from 6.5% to 6.4% but still above the 6.2% forecast, exhibits the same yearly pattern. Inflation is more than anticipated but is declining. That is good news for both markets and the US economy.

We also want to underline that despite declining rent costs, the housing sector contributes to increased inflation. This is because of a computation error that economists at the Federal Reserve are familiar with. The data on the slowing home market won’t be available for a few more months.

Everyone is aware that inflation is declining.

The labour market is booming, and the Fed is still planning to raise rates in March. However, even if employment is at an all-time high, inflation is declining. That is fantastic news for stock markets, the global economy, and the US economy. Continuous pressure is what it implies for the US dollar.

“Inflation in the US is easing, but only slowly. This was confirmed by the January figures, with a slight drop from 6.5% to 6.4%. The Federal Reserve can therefore not yet be satisfied.” Said analysis at Commerzbank.

Gold Knee-jerk

As the markets process the full inflation data that the United States of America has released, the price of gold fluctuates. For the month-over-month data, the US Consumer Price Index came in at 0.4% vs. 0.4% anticipated. The US CPI for January came in at +6.4% for the year, more than the projected +6.2%.

Fed swaps suggest that as a result, the predicted funds rates in 2023 won’t move significantly. As a result, there has been some softening in the US Dollar, which is assisting in driving up the price of Gold. The price of gold is currently trading at $1,860, in the middle of the day’s range.

On the basis of this information, the market is likely to reduce its expectations for interest rates, which is causing the price of gold to increase. Although bullion is thought of as an inflation hedge, it is very sensitive to rising US interest rates because they raise the opportunity cost of holding the asset with a zero yield.

Markets anticipated the Fed’s target rate to reach a peak of 5.188% in July from its current range of 4.5% to 4.75% prior to the release of the data. In contrast to the near-even odds projected of a higher fed funds rate, Fed funds futures are now pricing in a top-fed funds fund rate of 5.0%–5.25% by July.

Forex

The dollar fell to its lowest level in nearly two weeks on Tuesday after data showed consumer prices rose in January, but it recorded its smallest annual rise since October 2021, confirming expectations that the Federal Reserve may be close to ending the monetary tightening cycle.

The greenback rose briefly after the release of the data, but fell overall after a few minutes.

In early trading, the dollar index fell 0.2 percent to 102.93. It fell to 102.50, its weakest level since February 3. Against the yen, the dollar fell 0.1 percent to 132.34.

Euro rose 0.3 percent to $1.0754, its highest level in nearly two weeks at $1.0805, after the data was published.