Published 10 Jan, 2023
As the new year kicks off, inflation in the US has continued to slow for the sixth month in a row, while the Federal Reserve’s aggressive rate hikes are beginning to have a cooling effect on the labor market. As a result, US stocks started the year on a positive note, with all major indexes staging a rally in the first week of 2023.
However, while markets are cheering the ‘Goldilocks’ jobs report in the hopes that the economy is slowing down, the labor market remains tight. Data released by the U.S. Labor Department on Friday showed an increase of 223,000 jobs in December, and the unemployment rate edged down from 3.7% to 3.5%. This matches a 50-year low as the US added 4.5 million jobs in 2022 and the economy continues to heal. This, coupled with employment rising, means we are seeing wage growth slowing, falling to 6.2% compared to 6.7% the previous month.
Meanwhile, inflation remains well above the central bank’s target, which is likely to result in the Fed continuing to tighten monetary policy for the time being.
With this in mind, let’s take a deeper dive into the US inflation figures based on Truflation data. The US Truflation CPI continued to fall throughout December, sitting at 5.7% as of January 7, 2023, down from 6% on December 8, 2022.
This decline was led by the following categories:
However, despite inflation cooling down and hopes for a soft landing to stoke investor sentiment, economic indicators remain mixed. Here’s an overview of the latest releases and indicators:
As economic data remains mixed, the Federal Reserve can be expected to continue raising rates in its next policy meeting, albeit at a slower pace than in 2022. December already saw a slowdown in rate hikes from 0.75% to 0.5%. The market expects January’s rate increase to be smaller still at 0.25%.
Truflation is betting that the Federal Reserve's aggressive monetary campaign managed to slow the consumer price growth in December. On Thursday, the US Bureau of Labour Statistics (BLS) will release its consumer price index report. Truflation forecast models predict the reported inflation figure to go from 7.1% in November to 6.4-6.5% in December, in line or slightly below market consensus and another significant drop since September 2022.
At the same time, the community model, which also uses Truflation data and assumes that the official CPI is three months behind, predicted the US December YoY inflation at 6.8%, which would place it well above the market expectation potentially rattling the markets.
Oliver Rust, Truflation's Project Lead and Data Expert, said: “While inflation continues to cool, the labor market remains tight as recession fears seem to have subsided for the time being. As such, we don’t expect the Federal Reserve to relax any time soon, though we foresee a slowing of interest rate increases going forward.
In its next meeting between January 31st and February 1st, we expect the Fed to increase the federal funds rate again by 50 basis points to 4.75%-5%. With economic data remaining mixed, the coming months will reveal whether the US can truly avoid a recession.”
Truflation is an economic data aggregator serving independent, unbiased, real-time data. Truflation’s mission is to help individuals, investors, companies, and institutions make more informed decisions by accessing independent and unbiased economic information.