Following twelve months of continuous decline, the US inflation rate experienced a slight increase of 0.2% last month, reaching 3.2%.
Analysts and the media were generally positive about it, pointing out that the inflation rate came in below the anticipated 3.3%. Additionally, they highlighted that real wages had risen when accounting for inflation.
To me, it looks like a ‘half cup empty, half cup full’ situation. I had anticipated the inflation rate to drop below 3%, considering that we might have reached the peak interest rates.
If the inflation rate continues to rise in the coming months, particularly with the increase in oil prices, it could potentially lead to a shift in the Fed’s position. This, in turn, might result in an upward adjustment of the peak interest rate. In such a scenario, market expectations could be adversely affected, causing markets to once again decline as they readjust to these revised rates.
The half-cup-full situation lies in the fact that the core Personal Consumption Expenditures (PCE) index has experienced a decrease, dropping to 4.1% in July from its previous level of 4.6% in June. The core PCE index specifically excludes food and energy prices and is considered a gauge of longer-term price trends for goods and services. Notably, the Fed prefers to use this core PCE data and aims for a 2% target.
Although the current core PCE index remains elevated at 4.1%, surpassing the 2% target, its notable decline from previous months could potentially influence the Fed’s decision to maintain at the current interest rates, indicating that their strategies are yielding results.
Thus, it is a mixed set of inflation data and it is anyone’s guess where the Fed will move from here.
The stock market experienced a surge with the S&P 500 making gains of nearly 1%, only to relinquish those gains later and ultimately finish the day unchanged.
This is typically not a good sign and the market remains weak. Even a not-so-bad set of inflation data and positive market commentary have failed to sustain the rally. What happens when there aren’t any positive news coverage? The markets would have probably went down.
I still hold the view a correction is in the cards and this weak closing is another sign to reinforce the view.
