Inflation Outlook Improves Ahead of Interest Rate Announcement

•  trendspotteam

•  Jan 31 2023
 

The stock market received a boost from the household income and expenditure report for the month of December. The tailwind from the weekend will continue into the beginning of the week, with a keen wait for the Fed's interest rate announcement on Wednesday.

The report raised a number of points that will be warmly received by Jerome Powell. First, there is a noticeable slowdown in household spending. They decreased 0.2% in December and the figure for November was revised downwards from an increase of 0.1% to a decrease of a similar rate. Also, the decrease in expenses was twice the market expectations. The Fed again clarified that the moderation of demand within the US is a key condition for a calm in the inflation arena, so it will be satisfied with that.

Second, the rate of annual change in the price index of household expenses, which is the Fed's favorite index for measuring inflation and making decisions about it, continues to slow down.

In all of 2022, the index rose 5%, down from 5.5% in November and about 7% in the middle of last year. In fact, the rate of change has decreased in 5 of the last six months, which may indicate a more consistent trend.

To the positive sentiment can be added another figure published on the University of Michigan consumer sentiment index for the month of January. The index shows that consumer inflation expectations fell from 4.4% in December to 3.9%. Thus, it appears that achieving the Fed's main goal, a decrease in core inflation, is making good progress.

Despite the optimistic spirit, it should be taken into account that the rate of change of the index without food and energy is still lower than that of the general index, so that the supply and goods side is still pulling upwards, which will challenge the Fed's interest rate policy in the future. One of the concerns is that the opening of China's economy, which will probably be felt in the global economy from the second quarter of the year, will lead to renewed pressure on the prices of goods in the world, because China is a net importer of many of them.

Also, the distance from today's inflation rate to the target level of 2% is still high and there is still a long way to go to achieve the Fed's inflation forecast for 2023 of 3.1%.

Conclusion

The data are positive enough for the upcoming interest rate hike to moderate to only 25 basis points. However, they do not foster expectations that the upcoming interest rate hike will be the last. In addition, we still do not see any signs of a real contraction in the economy.

We will have to wait for Powell's speech and the interest rate announcement in order to look for signs of how the Fed sees the continuation of policy in 2023. The announcement will have a great impact on the mood that the markets will behave in the future.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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