Company / Analytics

Analytics, 15 February 2023

Consumer Price Index Data

Global inflation has left people struggling with soaring prices since last year, resulting in a decline in the real value of their income despite historic wage increases. High inflation has also amplified the risk of a recession.

Depending on how you look at the data, the facts could point out that:

- In the past seven months ending in January, Inflation has eased, aided by lower costs for used vehicles. This has offered some relief to consumers struggling with high prices over the past year.

- If looked at from a month-to-month perspective, prices increased by 0.5% in January compared with a slower gain of 0.1% in December. The acceleration was mostly caused by shelter costs.

In this article we shall look at the Consumer Price Index data recently released and the market reaction.

Inflation Data

The US Bureau of Labor Statistics reported on Tuesday that inflation in the United States, as measured by the Consumer Price Index (CPI), declined to 6.4% in January from 6.5% in December. This reading was higher than the market expectation by 0.3%. On a monthly basis, the CPI was up 0.5%, matching analysts’ estimate.

The Core CPI, which excludes volatile food and energy prices, rose 0.4% on a monthly basis as expected, bringing the annual rate down to 5.6% from 5.7%. It also showed that prices for a range of goods and services rose by 6.4% over the past 12 months, down slightly from an annual rate of 6.5% in December and a 40-year high of 9.1% in June.

The UK annualized Consumer Prices Index (CPI) came in at 10.1% in January against the 10.5% increase recorded in December while missing estimates of a 10.3% print, the UK Office for National Statistics (ONS) reported on Wednesday. The index keeps moving away from its highest level at 11.1%.

Meanwhile, the Core CPI gauge (excluding volatile food and energy items) eased to 5.8% YoY last month versus 6.3% seen in December. The market consensus was for a 6.2% print.

The monthly figures showed that the UK consumer prices declined by 0.6% in January vs. -0.4% expectations and 0.4% prior. The UK Retail Price Index for January stood at 0% MoM and 13.4% YoY, beating expectations across the time horizon.

Market reaction

Inflation for the January period beat estimates on both core and headline prints reflecting the sticky inflationary pressures in the U.S. The initial market reaction seems in complete contrast to the data with the USD on offer while U.S. stocks (SPX) push higher. The 2-year government bond yield is in limbo as markets digest the report. Only time will tell if markets will follow through with this response or not. The U.S session open may well reverse this response and follow the traditional economic reply.

Looking deeper into the CPI report, energy prices showed a 2% rise while food and services contributed to the upside. A quote from the Bureau of Labor Statistics may be driving the recent contradictory move in market pricing which reads “The all items index increased 6.4 percent for the 12 months ending January; this was the smallest 12- month increase since the period ending October 2021.”

Looking ahead, Fed officials will come into focus likely echoing the Fed’s goal to bring down inflation thus increasing hawkish bets.

Investor’s Note

The severe inflationary crisis combined with a global slowdown in economic growth, driven in part by the war in Ukraine and the global energy crisis, are causing a striking fall in real monthly wages in many countries.

The US economy has recovered quickly from the pandemic but the bounce back in demand has stressed supply chains and caused inflation to rise sharply. The economy is expected to slow, as the Federal Reserve (the Fed) continues to tighten monetary policy and COVID 19 economic relief programs come to an end, bringing core Personal Consumption Expenditure (PCE) inflation down to the Fed’s 2 percent medium-term target by late 2023. However, if inflation is more persistent than expected, the Fed will need to tighten more, which will further slow the economy.

Among advanced G20 countries, real wages in the first half of 2022 are estimated to have declined to minus 2.2 per cent, whereas real wages in emerging G20 countries grew by 0.8 per cent, 2.6 percent less than in 2019, the year before the COVID-19 pandemic.

According to a new International Labour Organization (ILO) report, the crisis is reducing the purchasing power of the middle classes and hitting low-income households particularly hard.

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