Consumer Price Index, more commonly known as CPI, numbers this morning showing inflation rates in the United States came out below expectations.
Prices in June rose just 0.2% compared with an expected rise of 0.3%, and annual inflation fell to 3.0% versus 3.1% expected. The stickier “core” measure, excluding food and energy prices, rose 4.8% versus 5.0% expected.
These numbers are undoubtedly good news for the larger US economic picture. This decrease makes the Federal Reserve’s “hawkish skip” in its rate hike cycle last month look quite prudent, something of which markets were wholly unconvinced earlier this month. Equities are soaring on the news, moving in the traditional reverse correlation with the United States Dollar. DJIA and S&P futures are up an average of half a percent pre-market, while USD is losing ground across the G10 board to a similar tune of roughly half a percent at the time of writing.
While traders still believe that a 25 basis-point hike at the end of this month is all but a done deal, the second (and potentially final) hike that Jerome Powell and Fed officials have promised later this year no longer seems nearly as likely as even earlier this week. This bet adjustment is prompting a sharp repricing of USD. The DXY index, a general gauge of the Dollar’s strength, has fallen just shy of 0.5% percent this morning as markets begin to adjust their expectations for the terminal interest rate of this cycle from the Fed. Just last month, whispers of a benchmark rate of 6% shocked markets and strengthened the Dollar, but this no longer seems viable – current terminal expectations are just above 5.25%, a dramatic reversal.
The United States economy has remained relatively strong through this tightening cycle, keeping job losses minimum and growth close to the government’s 2% target. Compared with the macro picture worldwide, the Fed’s job is much easier than that of the Bank of England. Most other nations in the G10 are staring down the barrel of sticky inflation in the 5-6% realm coupled with sputtering growth, prompting other central banks to say they will continue to hike interest rates through the remainder of the year. The Bank of England has promised at least four more rate hikes and may reach a terminal interest rate as high as 6.5% to tackle the UK’s “cost-of-living crisis,” However, this may come at the expense of any economic growth and push the UK into a recession.
Central banks remain a key driver of currency prices. A higher benchmark interest rate makes a currency more attractive to investors, so the news out of the US is a recipe for a weaker Dollar through the second half of the year as US interest rates hold below those of the rest of the world. This means less pain in the average consumer’s wallet, too. Though prices of goods and services will never actually decrease, a slowdown in the pace of inflation means that, domestically, people can begin to catch their breath a little bit. In perspective, year-over-year inflation was as high as 9% last year, so today’s reading is a welcome reprieve for the US.