BREAKING: US inflation at 6.5%, what does it mean for markets?

US inflation 6.5%, what does it mean for markets?

The most important number in finance, the US CPI number reporting on the latest bout of inflation, was released Thursday. The headline number landed at 6.5%, the lowest mark since October 2021. It marks the fifth consecutive month where inflation has fallen year-over-year.  

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Analysts had forecasted a rate of 6.5%, meaning the reading came in as anticipated.

Next interest rate decision expected on February 1st

Eyes will now turn to the Federal Reserve, which next meets on February 1^st to decide the latest plans on interest rate policy. Last year, the Fed hiked seven times, sucking liquidity out of the markets and sending prices aggressively downward. It has been clear that it is prioritising inflation, and the path of interest rates shows it has not been bluffing.

Market reaction

Markets had risen this week as optimism had crept into the market following the prior two months of positive inflation data. Europe also announced inflation below previous expectations last Friday. European stocks had climbed to their highest levels since May 2022 on the news.    

US stocks had also risen, with the S&P 500 up 4% before the CPI data was revealed. Even the crypto markets, which had a brutal start to the year, were showing nice gains, as risk assets across the board speculated that a pivot off high interest rates was coming earlier than anticipated.

As this article was published in the minutes after the announcement, markets showed a relatively muted reaction, to be expected given the rate landed in line with expectations and was largely priced in.

Core inflation

While the headline number has dropped significantly in recent months, investors had been concerned about the core inflation rate, which strips out the more volatile food and energy prices from the calculation.

With gas prices having coming down following an extreme climb last year, the headline rate benefitted from those prior high prices dropping out of the index. Typically, policymakers focus more on the core rate, as this is what monetary policy can more closely affect. In Europe, stocks actually pulled back last month on the day of the inflation reveal, as the core rate proved stickier than anticipated.

Today in the US, the core rate landed at 5.7%, also in line with expectations. It is down from 6% last month, and a boon to see it fall alongside the headline number.

Jerome Powell, the Fed Chairman, said last month that the Fed would need “substantially more evidence” that inflation is softening, adding that “my view and my colleagues’ view is that this will take some time…let’s just understand we have a long way to go to get back to price stability”.

Therefore, eyes will now turn to February 1^st  on the calendar, when the latest policy decision will be made by the Fed. Like it has been all year, it is the Fed’s interest rate policy that is leading markets, and right now, there is nothing more important than the monthly CPI number.