Washington, Dusseldorf, New York The latest US inflation data is raising hopes that inflation in the world’s main economy has finally peaked. That could give the US Federal Reserve room for a somewhat more relaxed interest rate policy. In December, price pressure in the USA weakened again. Consumer prices rose by 6.5 percent compared to the same period last year. Experts had expected this value – the lowest since October 2021. In November, prices had risen by 7.1 percent and in June by as much as 9.1 percent.
The new price data are raising expectations on the markets that the US Federal Reserve will slow down its rate hikes in the new year. The monetary authorities have raised the key interest rate in several steps over the past few months to a range of 4.25 to 4.50 percent. In December, the Fed chose an adjustment of 50 basis points, after four hikes of 0.75 percentage points each.
Since inflation is weakening, the central bank recently signaled that it would slow down the pace of monetary tightening. The Fed’s inflation target is two percent, and the next interest rate decision is on February 1st. On the futures markets, the inflation data reinforced expectations that the Fed would only raise interest rates by a quarter of a percentage point in early February.
For Bastian Hepperle from the Hauck Aufhäuser Lampe bank, the decline in the inflation rate was “not a flash in the pan”. According to the expert, the two in front of the decimal point could appear again in June for the first time in more than two years. “The direction is right, but inflationary pressures are still too high to calm the Fed. The Fed will continue to tighten interest rates, but slowly has to be careful not to overdo it,” says the economist.
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In early trading, the US stock exchanges initially hardly reacted to the data that had actually been eagerly awaited. On the one hand, analysts attribute this to the fact that the inflation figures were exactly as forecast by the economists. On the other hand, investors on the stock markets have already anticipated part of the development. The leading US index, the Dow Jones, has risen by 2.5 percent since the beginning of January, and the technology-heavy Nasdaq by as much as 3.8 percent. Richard Flynn of US broker Charles Schwab believes that investors will take the current data on inflation as a “cautiously positive” sign overall.
The central bankers around their President Jerome Powell are facing the major challenge of having to counter the still very high inflation in the country with an aggressive interest rate policy without putting too much strain on the economy. However, various economic indicators, such as those from the US labor market, are currently still robust.
However, monetary policy only has a delayed effect on the economy. For this reason, the CEO of the major bank JP Morgan, Jamie Dimon, had spoken out in advance for a pause in the rate hike process in order to be able to assess the effect of the steps taken so far. However, according to Dimon, the Fed may have to raise interest rates even more than expected later on.
Market expert Mohamed El-Erian, who advises Allianz among other things, tweeted that the decline was important. But it does not mean the end of the inflation problem. It is important that a declining trend is also discernible in core inflation and in inflation on a broad basis.
Core inflation, which excludes the most volatile energy and food prices, rose 5.7 percent year-on-year in December (up 0.3 percentage points compared to November). Energy prices rose by 7.3 percent year-on-year (down 4.5 percentage points), food by 10.4 percent (up 0.3 points).
US Inflation Expert: “Right Direction”
“We’re moving in the right direction,” commented Edward Jones’ senior investment strategist Mona Mahajan on CNBC’s business news channel. “Our hope is that it will continue like this,” she says. Mahajan expects core inflation – excluding food and energy prices – to be 3 percent by the end of 2023.
Dana Peterson, chief economist of the Conference Board, also speaks of “good numbers”. Like Mahajan, she expects the Fed to hike rates by 0.25 percentage points at least twice more this year.
“Hallelujah,” comments University of Michigan economics professor Betsey Stevenson. “Together with the recent fantastic job report” is good news. Last week, data on what has been a very resilient US job market showed that wages are rising at a slower pace, even as unemployment has fallen to record lows. “I think that will reassure people,” Stevenson says of the inflation numbers. It shows that the labor market can continue to grow and that inflation is still coming down.
US President Biden sets an additional date on inflation
The topic of inflation is also extremely important for politicians: the US President has even scheduled an extra appointment for Thursday at short notice. This is often a sign that he has something to celebrate. In the morning, Joe Biden will deliver a speech “about the economy and our efforts to fight inflation,” the White House said.
Falling inflation rates are a topic Biden has been particularly fond of talking about these weeks. After all, his team is already working in the background on a campaign for the 2024 presidential elections, according to US media.
Millions of US citizens still feel the higher prices in everyday life. But some of the Biden administration’s measures are having an effect, for example on the cost of prescription drugs.
The Inflation Reduction Act, which Biden signed into law in August 2022, gave the government the power to negotiate prescription drug prices directly with pharmaceutical companies for the first time. The diabetes drug insulin, for example, for which those affected sometimes have to pay several hundred US dollars, should only cost a fraction of that in the future.
“Thanks to President Biden, American families can finally afford their medicines,” Health Minister Xaver Becerra said on Wednesday. According to the minister, the US government intends to make ten more drugs cheaper by autumn.
The slowdown in inflation is due to a number of factors, said the US Chamber of Commerce, the largest American lobbying association with 7,000 organized companies. Supply chains that have been blocked so far would gradually work again. Gasoline is cheaper, energy prices are stabilizing. “The burdens are decreasing overall,” the association said.
Despite the positive signals, the Washington-based World Bank warns against too much optimism. In its latest “Global Economic Prospects” report, the institute points to the long-term effects of inflation. The higher inflation rates of the past year and a half and the associated higher interest rates and lower global investments would also determine the year 2023. Given the “fragile economic conditions,” according to the World Bank, any new negative developments could further slow growth – and “push the global economy into recession.”
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