US Inflation Half the Pace Is Not Good Enough

The US just saw a major improvement in current inflation.

Headline CPI has halved from the peak to now 4.0%. While the monthly rise was almost flat at just 0.1%. Both results were in fact better than the market had hoped for.

US Inflation 4.0%Core Inflation 5.3%

Yet the equity market, while seeing an initial bounce, then spent the rest of the trading day oscillating sideways. The bond market also soon began to roll over again pointing to higher yields to come. It would appear that markets have already fully priced this latest decline in inflation.

Markets may also be recognising that even at these levels, half the previous pace of price rises for the headline CPI, but still clinging near the peak that we saw for core inflation, there is absolutely no room at all for the Federal Reserve to lower rates anytime soon, and probably not this year.

The Federal Reserve will however very likely be on hold for the moment. For in the background, that banking crisis, removed from most headlines but still very much alive, remains a major concern. With inflation, headline at least, dropping away more quickly now, the Fed will see this as a window of opportunity to pause. In the hope that such declines continue.

This was not however a data outcome worthy of celebration?

The extreme burden of the tremendous skyrocketing price gains of the past couple of years continue to eat away at the very foundations of the US economy. Continuing to squeeze and pressure businesses and consumers to adjust behaviour. And prices are still going up at what remains an alarming rate.

While markets have appeared fixated on the prospect of lower inflation allowing the Federal Reserve to pivot and cuts rates, the truth of the matter is that rate cuts remain possible at these levels. Even if the Federal Reserve were to change its inflation target, lifting it from 2% to 3%, as a pathway for attending to the banking crisis and a crumbling economy sooner, it is very unlikely any rate cuts will be seen in 2023.

Questions must begin to be asked too about the on-going viability of stock valuations remaining at current levels as the US and global economies continue slowing. The central bank of China has just had to ease monetary conditions in an attempt to cushion the current slow down evolving from that ‘out of lockdown bounce’. European business and investor confidence released yesterday also points to caution moving forward.

There is no doubt the world’s three largest economic zones continue to face significant challenges.

US inflation is improving, but remains at what really are crisis levels. The economic shock of this inflationary period continues to build at an alarming rate.

Investors who expected this latest drop in inflation to provide a substantial lift to equity markets are likely to be disappointed.

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