Inflation in the US is weakening, but it is a slow process

Yesterday the United States presented again the consumer price index for April. The monthly dynamics of changes was at a similar level as before. The annual change taking into account energy and food prices indicated a decrease from 5 percent. up to 4,9 percent and the base index fell from 5,6 percent. up to 5,5 percent.

The dollar depreciated as a result of the data release and the main currency pair approached the level of 1,10 again. Gold rose to 2048 USD/oz but reduced its gains in the following hours. Wall Street indices mostly glowed green, Nasdaq Composite grew by more than 1 percent.

End of tightening cycle?

Although inflation in the US has passed its peak, the momentum remains high. Energy prices have managed to stabilize since last year's summer holidays. Food prices have also stopped rising. The base indicator, which is more significant in terms of the trend, was 5,5% in April. which was as expected.

There is progress in US rents, the most important item in consumer spending. For the second month in a row, they grew at a slower pace than before, which confirms the thesis that trend reversal has begun. Now, however, inflationary pressures are picking up again for some goods, such as used cars, which are up 4,4% in price. It is possible that the sharp rise in income here causes the prices to rise.

The scenario is confirmed that the price growth dynamics will weaken this year, but will still remain above the Fed's target. The decision a week ago to raise interest rates by 25 basis points was correct probably the last in this tightening cycle, although we have not received an official announcement from US decision makers. At least that's what the statement said, which was more balanced than the March one. Recall that the statement that "some additional policy tightening may be appropriate" was omitted.

US debt deadlock

At this point, the bar justifying further tightening is now set higher. Powell stated at a press conference that banking conditions had improved widely since March Silicon Valley bank collapsed and Signature Bank. However, the Fed noted that credit conditions for households and businesses are likely to weigh on economic activity, employment and have a dampening effect on inflation. This last point seems to be crucial. I assume the Federal Reserve will remain in wait mode in June. A likely decision is to keep interest rates unchanged.

Historically, the Fed has not leaves plenty of time to cut feet – over the last 50 years, the average period between the last increase and the first cut was only six months. If we want to stick to this theory, then the easing of monetary conditions should take place in November this year.

At the moment, there is also the topic of the impasse on the US debt ceiling. It causes dark clouds to hang over the economic outlook, which may require a quick change of the Fed's position in the coming months.

At the moment, the market is pricing in the possibility of "easing" already in September, although it is unlikely. Until then, inflation will be somewhere around 4 percent. which is still twice the Federal Reserve's target.

Source: Łukasz Zembik, OANDA TMS Brokers