3 - 5 minute read
The Consumer Price Index (CPI) report for March 2023 was released on Wednesday, with a significant improvement in the headline CPI figures. The inflation rate for February, which was at 6.0%, dropped to 5.0% in March. Despite this notable drop, the stock market did not react positively. In the video covering the report, the speaker explains that although the headline inflation figure saw a dramatic fall, core inflation increased from 5.5% to 5.6%. Core inflation strips out food and energy prices, which are on the rise. The report shows big improvement in headline inflation figures, considering the rise in petroleum prices last year. However, core inflation is concerning as it means that the US Federal Reserve may pause before making a decision on raising interest rates by 0.25%.
According to the Federal Reserve, core inflation is the better gauge of inflation, and it will be the tool used to evaluate their progress in fighting inflation. The probability of the Federal Reserve raising interest rates by 25 basis points was at 72% before the CPI inflation report was released. After the release, the probability had increased to 73%. Although there was a large decrease in the headline CPI figures, due to lower oil prices compared to last year, the Federal Reserve is still expected to raise interest rates.
Food and Services inflation was up year over year, with food inflation at 8.5% and Services at 7.1%. Shelter, which is slower to rise and fall, was up 8.2% from last year, making it the most important component that the Federal Reserve is focusing on. The report explains that the Federal Reserve has been concerned about an overheating labor market, which could contribute to wage inflation, leading to Service inflation, and ultimately contributing to overall inflation. The Services X Housing component is, therefore, still significantly elevated at 7.1% above the 5.0% headline figure.
The CPI inflation report is essential as it’s one of the four crucial pieces of information that the Federal Reserve uses to make its decision. The Federal Reserve is not only assessing whether to raise interest rates or not, but analysts and economists are also trying to determine when the Federal Reserve will start printing money again.
Household finances are also expected to grow by 3.3%. However, the rate of inflation is currently at 5.0%. This means that real wages are declining, and purchasing power is reducing, affecting spending by households. With households expected to spend 5.7% more this year, analysts and economists believe that inflation may go down if people cannot get loans to buy cars or homes.
The Bottom Line
The CPI inflation report provided new insights into the state of the market, and possible implications of the report’s data have significant implications for traders. With the Federal Reserve still expected to raise interest rates and the labor market still at risk of overheating, traders should be careful when choosing investments. Any increase in interest rates would lead to changes in market conditions which would affect the value of different assets. In conclusion, it’s essential to keep up with current events and economic reports to make informed investment decisions. The CPI inflation report is an essential tool for traders and analysts to determine how the market is performing and how they should invest.