US Inflation Falls Strongly, Sending Dollar Lower and Stocks Higher

For the first time in years, the decline in annualized US inflation beats expectations, producing dramatic market movements, especially in the Forex market and in US treasury yields.

The latest US CPI data delivered positive news for the United States economy as the annual rate of inflation fell for the fourth consecutive month down to 7.7%, and although prices in October did rise by 0.4% month-on month, this was a smaller increase than had been generally expected.

According to the Bureau of Labor Statistics, price rises over the past 12 months are now at their lowest level since January 2022 and have dropped below the 8% benchmark for the first time since February this year.

Core inflation remained relatively high at 6.3% but eased by 0.3% month on month.

Many analysts forecasted that annual inflation would fall but only to an annualized rate of 7.9%, so the latest figure is a welcome surprise.

Overall, the latest data signals that the pressure on consumers stateside may be continuing to ease.

Inflation and the Federal Reserve 

The CPI announcement raises some interesting questions for the Federal Reserve before its Federal Open Market Committee meet to discuss further interest rate rises on 14 December, after four consecutive 0.75% rate increases.

After last week’s rate rise, Fed Chair Jerome Powell made it clear that the Fed takes a hawkish stance on continuing to raise interest rates, and that there was no room for complacency. However, the latest inflation figures may well support the market view of many investors that interest rate rises now must be eased.

Currently the CME FedWatch Tool is divided on just how far that the Federal Reserve will go on interest rates, with 52% of market respondents believing that the next rate rise will now be reduced to 0.50%. 48% believe there will be a 0.75% rise for the fifth successive meeting.

In the aftermath of the inflation data release, the United States’ 2-year Treasury yield fell sharply to a level below 4.32%, which is quite a dramatic fall. This suggests that the market is seeing today’s inflation data as a major, significant turning point for the US economy.

Food Price Rises Ease 

Food costs grew by 0.6% in October, but this was the slowest pace of growth over the past six months, and month-on-month prices fell by 0.2%.

There was more positive news for the food at home index which increased by 0.4%, but the pace of growth was at its most sluggish since December 2021.

Yet, overall food prices remain comparatively high.

Four of the six major grocery store food group indexes climbed upwards over the month.

Cereal and bakery products rose the most at 0.8% month on month, while meats, poultry, fish, and eggs grew by 0.6% over October.

Energy Prices Rise Again 

After three months of falling energy costs, the energy index rose by 1.8% in October.

The gasoline index also escalated by 4% last month, after three consecutive falls.

The electricity index was revealed to have grown by a slender 0.1% margin, while natural gas prices were reduced by 4.6%, a significant turnaround from the 2.9% rise in September.

While the annual energy index has increased by a huge 17.6% over the past 12 months, 0.1% more than gasoline.

Yet this is a fall from the 19.8% increase in September for the annualized energy index.

US Dollar and Stock Markets Rise 

As the prospect of aggressive rate rises was eased by the CPI data, the US Dollar took a strong hit against other major currencies. The GBP/USD currency pair notably climbed to approach near what would be a 50-day high closing price, a remarkable turnaround for a currency pair which made an all-time low just a few short weeks ago.

The US stock market was cheered by the news, with the S&P 500 Index and the Nasdaq 100 Index increasing by 3.94% and 5.5% respectively.

Traders are now likely to find opportunities in the Forex market shorting the US Dollar.

Peter Taberner
Peter has been a UK-based freelance journalist for over 15 years, and has written for several financial publications including Funds Europe, Trade Finance Magazine, International Finance Magazine.

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