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U.S. Prices Low in Two Years and a Near-end Rate Hike

The U.S. Department of Labor's Consumer Price Index (CPI) was the focus of the market's attention on the 12th. In addition to the non-agricultural employment indicators released on the 7th, the CPI is the last indicator to gauge the U.S. Federal Reserve's intention before the Federal Open Market Committee (FOMC) on the 3rd of next month.


According to the March CPI released by the U.S. Department of Labor, inflation in the U.S. appears to have entered a superficial slowdown. On a year-on-year basis, it rose 5.0%, the lowest increase since May 2021. Inflation is gradually slowing down due to the Fed's aggressive rate hike, which began in March last year.


However, it is still high compared to the Fed's inflation target of 2%. Apart from slowing inflation, some predict that the Fed will carry out baby steps (a 0.25 percentage point increase in the benchmark interest rate) next month to end tightening.


Before the announcement of the CPI, Mot Capital CEO Michael Kramer said, "Inflation is still high, so even if the CPI meets or falls short of some of the expectations, it will not be a problem for the Fed to raise interest rates."


Core CPI, excluding food and energy, showed a larger increase compared to February, the previous month. The core CPI rose 5.6 percent year-on-year in March, compared with 5.5 percent in February. The core CPI is regarded as an indicator that more clearly reveals the long-term price trend as it excludes items with severe price fluctuations.


The core CPI in March also showed a high increase compared to the headline CPI of 5.0% in the same month. It is the first time in about two years that the core CPI growth rate has exceeded the headline CPI growth rate since January 2021. Overall inflation is slowing down, but key prices represented by the core price index are not being determined.


Veronica Clark, an economist at Citigroup, said, "The rise in the core CPI will provide the basis for the Fed's resumption of rate hikes amid still solid employment data in March."


The market seems to be more confident in next month's baby step due to the still high level of inflation. According to the Chicago Mercantile Exchange (CME) Fed Watch, which aggregates the U.S. benchmark interest rate outlook, the possibility of the Fed carrying out baby steps in May was 67.1 percent right after the CPI announcement. The figure overwhelms the 32.9 percent possibility of a rate freeze. 


After the CPI announcement, the U.S. stock market started higher on expectations that the Fed's rate hike was nearing its end. The Dow Jones Industrial Average of the New York Stock Exchange (NYSE) rose 22.26 points (0.29%) from the previous session, and the Dow Jones Index started 167.88 points (0.50%) higher.


However, there are still differences among Fed members over whether to raise interest rates next month, and a complete agreement has yet to be reached. According to Bloomberg on the 11th, Federal Reserve Bank of Chicago President Ostan Gulsby said in a speech at the Chicago Economic Club, "we need to carefully and patiently evaluate the economic impact of changes in credit conditions." In other words, we need to look at the bank crisis variables triggered by the bankruptcy of two U.S. banks last month.


On the other hand, hawkish members of the Fed argue that the interest rate hike should continue until next month. New York Fed President John Williams said in an interview with Yahoo Finance, "Inflation is slowing, but it is still much higher than the 2% target," stressing, "Fed officials' outlook for last month's freeze after one more rate hike is the starting point for reasonable discussions."


Edited by Palak Chauhan

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Tags: #cpi #economics


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