The latest Consumer Price Index (CPI) report in the US has revealed that inflation is cooling but remains persistent, causing concerns and a decline in the stock market. The report, released on Tuesday, is the first significant measure of US inflation this year. It shows that inflation was at 3.1% for the 12 months ending in January, a slight drop from December but still higher than expected. This unexpected data led to a sell-off on Wall Street, with the Dow falling more than 500 points amid fears that the US Federal Reserve might delay lowering interest rates.
Despite the market's reaction, the overall response to the CPI report suggests a cautious and wait-and-see approach regarding the Federal Reserve's potential actions with interest rates. Initially, there were expectations that there would be three rate cuts this year, but the market is starting to align with the reality that a rate cut may not occur until the summer. The situation this year is highly volatile, and sentiments regarding different economic data could change in just a matter of months.
Looking more closely at the CPI, excluding categories like food and shelter, the core CPI, ex-shelter, shows a 2% annualized rate for the past six months. This figure falls within the Federal Reserve's target range and should be seen as a positive aspect. However, it is essential to consider that excluding items like food, shelter, and healthcare costs overlooks the real-world impact of inflation on people's everyday lives.
Stripping out volatile categories allows for a better understanding of how the overall economy is performing, revealing whether companies are experiencing widespread cost increases and if inflation is affecting both goods and services. Nonetheless, the lived experience of inflation is what truly concerns individuals, leading to a gap between the data illustrating inflation control and people's sentiment, which remains cautious.
Monitoring another inflation report known as the 'super core inflation' published by the Commerce Department in a few weeks will provide further insights. This report focuses on services and excludes energy and housing costs. By examining services, officials aim to determine if the price spikes witnessed during the pandemic have subsided or worsened. This information will help gauge the current state of the cycle and the level of concern warranted.
Economic timing is crucial, particularly in relation to the upcoming presidential election. If geopolitical conflicts and unexpected economic events do not arise, the economic picture leading to the election cycle could favor President Joe Biden. However, it is worth noting that economic data has become partisan, with Democrats perceiving good news more positively than Republicans. This polarization of economic perspectives may influence how individuals interpret the economy's performance and its impact on the election outcome.
In conclusion, while the CPI report shows a cooling but persistent inflation rate, the reaction on Wall Street suggests a cautious outlook on potential interest rate changes. By examining core CPI and excluding certain categories, a more accurate portrayal of the overall economy can be observed. However, it is important to acknowledge the real-world impact of inflation on individuals' daily lives. Additionally, forthcoming reports tracking service-related inflation will offer insights into the larger economic cycle. The economic landscape leading up to the presidential election could benefit President Biden, but the politicization of economic data may affect how the public perceives the situation.
