On Thursday, American stocks reached a multi-month high, while the US dollar index hit a new low not seen since April 2022. The CBOE Volatility Index (VIX) and US bond yields decreased after positive US inflation data were released.

Inflation Retreats, Fed Rate Reaches Limit: What'S Behind The Drop?

Mixed Jobs and Inflation Data

Last week, the United States of America announced that job growth has been erratic. The numbers provided by ADP indicate that the United States added more than 400,000 jobs in June. This is the highest monthly total in recent data, which goes back years—according to separate data from the Department of Statistics, the country’s economy added nearly 209,000 jobs during the month. It turned out that the official report was better than everyone had anticipated.

Weak consumer price inflation was recorded for the United States on Wednesday. According to the most recent report from the Bureau of Labour Statistics, the headline consumer price index (CPI) decreased from 4.00% in May to 3.0% in June. A reduction in core inflation was also seen during the month under review.

As a direct consequence, inflation is gaining momentum and may exceed the 2% target rate earlier than was originally anticipated. One of the reasons is that prices have decreased worldwide, especially in China, which is on the verge of experiencing deflation. The United States is a significant market for the export of Chinese goods.

Because of the impact that these data will have on the FED, they will influence every type of financial asset. Most market analysts anticipate that the Federal Reserve will raise interest rates by 0.25 percentage points later this month before suspending additional rate hikes indefinitely.

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Implications for the FED

While the core consumer price index dropped to 4.8% for the 12 months ending in June and 0.2% on a monthly basis, this improvement may not be enough to prevent the FED from hiking interest rates at their meeting later this month.

The FEDs inflation target, as measured by the yearly change in the price index for personal consumption expenditures (a more comprehensive measure of price changes), is 2%. After a full year of data collection, the PCE index stood at 3.8% as of May. Excluding energy and food, the core PCE was 4.6%.

The central bank began raising interest rates in an effort to rein in inflation in March 2022 and stopped raising them a month ago. When the Federal Reserve meets later this month, rates will likely increase by another quarter point.

Inflation Retreats, Fed Rate Reaches Limit: What'S Behind The Drop?

Implications for Buyers

Consumers’ purchasing power and monthly budgets have been steadily eroded by substantial and pervasive price increases over the past two years, so the current report is encouraging.
Refinitiv estimates that economists were expecting a 3.1% gain for the year. Therefore, June’s annual rate is below those projections. The study indicated that prices rose 0.2% monthly, slower than the 0.4% increase in May.

Petrol prices increased by 1% from May but are still down by about 27% from last year. In the 12 months ending in June, food and grocery store prices increased by 5.7% and 4.7%, respectively. It’s still more expensive to dine out. According to the survey, the cost of eating out has increased by 7.7% annually.

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