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US Inflation Eases, but Fed's Influence Remains Crucial

US Inflation Eases, but Fed's Influence Remains Crucial
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    1. US inflation slows, but Fed has the last word

      The latest report on the US consumer price index reveals a slowdown in inflation, with an annual rate of 3.0% in June compared to 4.0% the previous month. This figure, slightly below the expected 3.1%, indicates a moderation in price growth. Core inflation also decelerated to 4.8% from 5.3%, falling in line with expectations. Surprisingly, this marks the ninth consecutive report where indicators have either met or fallen short of expectations, sparking a distinct market reaction.

      Notably, the response from the market differs this time around, as confidence grows and risk appetite increases, leading to a decline in the value of the US dollar. The latest report has fueled speculation that the Federal Reserve (Fed) may deviate from its planned two rate hikes this year or consider an expedited shift towards policy easing in the upcoming year.

       

      US inflation slows, but Fed has the last word

      The US consumer price index slowed to an annual rate of 3.0% in June from 4.0% the previous month. This was slightly below the expected 3.1%. Core inflation slowed to 4.8% from 5.3%, and 5.0% expected. This is the ninth consecutive report where an indicator has been in line or weaker than expected, but we see a different market reaction.

       

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      This time the markets are confident, risk appetite is rising, and the dollar is falling as the latest report has fuelled speculation that the Fed will not need to stick to its plan of two rate hikes this year or will allow for a quicker reversal to policy easing next year.

      While the Fed is often wrong in its forecasts, it is still the Fed that has the final say on interest rate decisions. Despite the constant inflation surprises, FOMC members remain hawkish in their comments, regularly pointing out that the fight against inflation is not over.

       

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      After the latest inflation report, the dollar index was close to its lowest level since April 2022, losing more than 12% from its peak last September. This decline creates additional pro-inflationary pressure, unlikely to please the central bank.

      Traders' and investors' attention should now turn to the Federal Reserve's assessment of the latest data. In addition to the speeches by Barkin, Kashkari and Bostic, the Fed's Beige Book will be released today, which will be used as the basis for the Fed's observations at the July meeting.

       

       

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      Alex Kuptsikevich

      Alex Kuptsikevich

      Financial market professional with 16-years' experience and Senior financial analyst at FxPro. Author of daily reviews on the impact of economic events with comments regularly featured in top international and Russian media. Covers fundamental analysis, global markets, foreign exchange market, gold, oil, cryptocurrencies.

      Alex Kuptsikevich is a regular contributor to both digital and print media including CNBC, Forbes, Reuters, MarketWatch, BBC and Coindesk.


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