US Inflation came in at just 3% for the year. This is however to a large degree due to the higher base effect taking into account that huge surge of a year ago. Prices are still going higher, even from those surge levels.
There will be no backing away by the Fed at least at its next meeting.
3% is the kind of number the Federal Reserve does want to see. There were serious concerns within the data however. The monthly inflation rate actually re-accelerated from 0.1% to 0.2%. Energy inflation fell massively, but electricity prices were 5.4% higher.
The all-important Core inflation rate did decline to 4.8%, but it remains only marginally off its peak and this is a red alert level for any central bank. Signalling the crisis is not yet resolved. Yesterday’s inflation numbers, though moving in the right direction, are not enough to convince the Fed the core rate is on its way back down in a sustainable fashion. Though core monthly inflation did fall to 0.2%.
There is a risk here, that as the adjustment to the new higher base of a year ago works its way through the data series, that overall inflation could still stabilise at too high a level for the Fed’s comfort.
Core inflation at 4.8% is in fact still a truly alarming level. The Fed will see no reason at all to relent from its tightening bias on the back of this data. ‘More work may well need to be done.’ This is likely to be the prevailing internal mantra at the Fed for the time being.
If we get another good result in the next round of data, then, finally, we may be at or very near to the terminal rate for the current hiking cycle. This has however been an historic re-pricing of interest by the Fed and other central banks. One, it must be stressed, which is not going away any time soon.
It is critical to understand that even when the Fed stops hiking, we have at least one more hike to come, there is no magical turnaround to a new phase of rate cuts. These are the new interest rate levels everyone must learn to live with. Permanently. They are here to stay.
At the same time, the continuing burden of higher prices will continue to grind the US consumer and businesses alike. There is neither any relief from the new higher prices permeating and circling through the economy constantly. They are here to stay too.
The combination of permanently higher rates, the US mortgage rate just shot to a new high above 7%, and very high living expenses, place the US consumer in a permanent pressure cooker from which the economy will find little escape.
We were respecting the immediate upward momentum in stocks for the time being. Again, though, equities are to a large degree still rallying on false hopes of rate cuts eventuating. Making the market eventually vulnerable to a correction.
Market analysis from Clifford Bennett, chief economist at ACY Securities.
