US Inflation: Will easing consumer prices lead towards calmer interest rate hikes?
US Inflation: What does CPI mean?
The US Consumer Price Index (CPI) is a measure of the average change in prices over time for goods and services consumed by households. Essentially, it is an economic indicator which shows if goods and services in a particular country are getting cheaper or more expensive.
US Inflation: What is the latest inflation reading?
The latest CPI reading for the month of December 2022 showed that consumer inflation levels in the US calmed slightly by 0.1%. It was the first time inflation calmed since May 2020.
US Inflation: Link between CPI and Interest Rates
Investors closely watch inflation data because it directly influences how the US central bank modifies its interest rates.
The US central bank uses interest rates as a way to control inflation. If inflation is rising too fast, the central bank hikes interest rates and if demand or prices in the economy is too low, it cuts its interest rates to encourage growth.
The central bank’s job is to find the right balance between interest rate hikes and cuts. Extremely high rates can dampen growth and low rates can push demand much higher than the supply in an economy.
Generally, if the economy is strong and growing, CPI expectations will be higher, while if the economy is weak or in a recession, expectations will be lower. Additionally, if the Federal Reserve raises interest rates, this can also lead to higher inflation expectations.
US Inflation: Will easing inflation lead to calmer interest rate hikes?
The latest inflation readings in the US showed consumer prices fell for the first time in more than 2-1/2 years in December as gasoline and motor vehicles prices declined, offering hope that inflation was now on a sustained downward trend.
Whenever inflation levels ease, the US central bank generally becomes more relaxed in its interest rate hikes. US equity markets were battered for the better half of 2022 because soaring inflation levels had prompted the US central bank to continuously hike interest rates.
According to data from Refinitiv, stock market traders are still pricing in a 25 basis point interest rate hike in February. However, economists expect the US central bank to slow down its interest rate hikes if inflation readings for January also eases a little.
US CPI can vary depending on a number of factors, including economic conditions, monetary policy, and global events.
US Inflation: Trend
US Inflation: Sectors most affected
Technology stocks:
Technology shares are most sensitive to interest rate changes and today’s CPI data can influence how shares in these sectors perform.
The Nasdaq 100, an index which contains the top technology stocks in the US generally drops whenever the US central bank raises interest rates. The index has dropped about 30% since January 2022 due to continuous rate hikes by the US central bank.
US Inflation: Nasdaq ETF performance
The Invesco Nasdaq ETF is the most widely invested US technology shares focused ETF. Here's a look at its performance:
Banking stocks:
The performance of banking stocks are directly proportional to interest rates in an economy. When interest rates rise, banks automatically hike their rates for various loans. Higher rates generally means lower demand for fresh loans which could hamper a bank’s finances.
This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.
Is CPI the same as inflation?
Typically, prices rise over time, but prices can also fall (a situation called deflation). The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.
Is higher CPI better or worse?
Is a lower CPI figure good for markets, or a higher figure? When the CPI is rising it means that consumer prices are also rising, and when it falls it means consumer prices are generally falling. In short, a higher CPI indicates higher inflation, while a falling CPI indicates lower inflation, or even deflation.
Does lower CPI mean deflation?
The CPI is the most commonly referenced index in the U.S. The economy is experiencing deflation when the change in prices in one period is lower than the next, revealing that the CPI index has declined.