US CPI data for the month of December has been released by The US Bureau of Labor Statistics. The year-on-year inflation number for December has fallen to 6.5% from 7.1% seen in November 2022.
The all-items index increased 6.5 percent for the 12 months ending December; this was the smallest 12-month increase since the period ending October 2021. All items less food and energy index rose 5.7 percent over the last 12 months, compared to 6% in November. The index for all items less food and energy, however, rose 0.3 percent in December, after rising 0.2 percent in November.
How the markets will react remains to be seen after the equity futures were higher post the consumer price index (CPI) release. “The latest U.S. inflation data will keep the global stock market rally on track. The data confirms that inflation is finally being tamed, which means there’s a higher chance that the Federal Reserve will pursue less aggressive interest rate hikes in the world’s largest economy,” says Nigel Green, CEO, deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.
Markets opened in green on Thursday but were found struggling to gain strength. “As the CPI data is out the futures started fluctuating during the market open on Thursday. Another report by the labor department showed that US unemployment benefits fell slightly lower and initial jobless claims dipped to 205,000, surprising market experts and economists. So, overall, the early sessions may levitate in either direction with so much to assimilate for traders,” says Kunal Sawhney, CEO, Kalkine Media.
Since October 2022, there has been a decrease in inflation, which may have led to a recent rally in the stock market. S&P 500 and Nasdaq 100 are both up by over 3.5% since the start of 2023. The inflation reading for December will now be used to determine how much the Federal Reserve will raise interest rates next. The next FOMC meeting of the US Fed is on January 31 – February 1 and the markets are expecting a 25 basis points hike in rates. “We expect the latest U.S. inflation data will keep the global stock market rally on track. The markets now await the next FOMC decision on interest rates, but until then, the rally is set to continue,” adds Green.
Many economists, analysts, and investors anticipate that the labour market and inflation data will have moderated to the point where the central bank will be compelled to suspend rate increases before their May meeting. However, given that the Fed has already indicated that the terminal federal funds rate may surpass 5% and that a rate cut is only likely to occur in 2024, this may remain wishful thinking.
Also Read: US CPI calculation to change for January inflation data
Expectations by the market regarding inflation numbers were around the same range. The Bureau of Labor Statistics December CPI index, which measures increases in the prices consumers pay for goods and services, was predicted to show a 6.5% increase from a year earlier, dropping from the 7.1% increase reported the previous month. The core inflation index, which excludes volatile expenses for food and fuel, was projected to increase by 0.3% from November or 5.7% annually.
There will be a change in the way the US CPI is calculated going forward. To improve the accuracy and usefulness of the Consumer Price Index (CPI), the Bureau of Labor Statistics (BLS) intends to update spending weights on an annual basis using data from a single calendar year. This differs from the previous method, which updated weights every two years using two years’ worth of expenditure data. This revision will take effect when the US CPI index for January 2023 is calculated using data on consumer spending from 2021. The release of the January 2023 CPI data on Friday, February 10, 2023, will mark the start of the transition to yearly weights.