Market Insight – US CPI Reaction

The market continues to react to falling inflation in the world’s largest economy as US Consumer Price Index data for June 2023 came out slightly lower than expected, reflecting a slower inflation rate.

The overall CPI increased by 3.0% year-on-year, matching the expected figure but lower than the previous 4.0%. On a month-on-month basis, the CPI grew by 0.2%, slightly less than the expected 0.3% and up from last month’s 0.1% growth.

Meanwhile, the core CPI, which excludes volatile items like food and energy, increased by 0.2% month-on-month, lower than the anticipated 0.3% and down from last month’s 0.4%. The year-on-year core CPI was 4.8%, under the expected 5.0% and down from last month’s 5.3%.

JP Morgan stated that “Core CPI is already off 1.7%-points from its high. The standard models predict that the next 2-3%-points of disinflation will require a significant employment sacrifice, but those models missed both the run-up and partial climb down in inflation.“

Goldman Sachs are tipping the July Federal Open Market Committee Stating that the hike is to be the final in the cycle. The result of the inflation report “is consistent with our view that Fed tightening is in its final innings.”

The investment bank Goldman Sachs said they thus continue to expect “a final 25bp hike at the July FOMC meeting to 5.25%-5.5%, followed by unchanged policy for the remainder of the year.”

The annual core consumer price inflation rate in the United States, which excludes volatile items such as food and energy, marking the lowest since October 2021, from 5.3% in the prior month and below market expectations of 5%. 

Markets are likely to be encouraged by the fall in Core inflation. We really need to see Core inflation dropping to really encourage the notion that the Fed is stopping hiking.