The latest Consumer Price Index (CPI) report indicates that annual US inflation slowed down to 6.4%, the smallest decrease since October 2021, even as monthly inflation rose by 0.5% from December.
Used car and medical care prices were responsible for the decline, but shelter and energy prices prevented a more significant drop. This news comes after a surprising job report that showed employers hired 517,000 new workers, exceeding economists' expectations. Despite historic wage increases, high prices over the past year have reduced the real value of Americans' income and increased the risk of a recession.
Source: US Bureau of Labor Statistics
Given market realities, these inflation figures have been mixed, causing mixed market reactions. Let's take a closer look at this.
Mixed US inflation figures
The CPI (Consumer Price Index) looks at how the prices of more than 200 things people buy regularly change over time. It also looks at how much of the average American's money is spent on each of these things. This is done so that the overall CPI reflects the proportional price changes consumers experience.
According to the Bureau of Labor Statistics, rising shelter costs account for approximately 50% of the monthly increase. The component, which makes up over a third of the index, rose 0.7% for the month and increased 7.9% from a year ago.
Energy and food costs also played a significant role, with increases of 2% and 0.5%, respectively, and 8.7% and 10.1% from a year ago, respectively. As a result, workers experienced a loss in real pay, with average hourly earnings falling by 0.2% for the month and 1.8% from a year ago, according to a separate BLS report.
Although price increases had been decreasing in recent months, January's data suggests that inflation is still a threat to the U.S. economy, which is at risk of slipping into a recession this year.
Despite the Federal Reserve's efforts to address the issue by raising its benchmark interest rate eight times since March 2022, inflation continues to persist. While Fed Chairman Jerome Powell has mentioned "disinflationary" forces, January's figures suggest that the central bank still has work to do. Recent strong employment data could lead to several more Fed rate hikes.
How does this affect Stocks and the US Dollar?
Markets had a mixed reaction to today's US data.
In particular, the US Dollar gained several points and S&P500 ($SPX500) futures fluctuated between gains and losses after better-than-expected US inflation data for the year opened the door for further interest rate hikes by the Federal Reserve.
Some analysts believe that the release of CPI data may offer insights that could potentially impact market trends. However, it's important to keep in mind that the stock market is complex and can be influenced by many factors beyond the CPI.
So far, volatility is too high, but it also gives traders plenty of opportunities to find a rational way to trade the spot and CFDs.
Summary
- The latest US Consumer Price Index (CPI) report shows a 6.4% annual inflation rate, the smallest increase since October 2021, but monthly inflation rose by 0.5% from December.
- Shelter costs, energy, and food costs played a significant role in the increase in CPI, while used car and medical care prices were responsible for the decline.
- High prices over the past year have reduced the real value of Americans' income and increased the risk of a recession, despite historic wage increases.
- Recent strong employment and CPI data could lead to several more Fed rate hikes as the Federal Reserve continues its efforts to address inflation.
