US headline inflation tapers lower to 6.5% for December 2022

It was a tale of two inflations in the US. The prices of most goods is down but the prices of most services are still rising. That is creating the dichotomy as services inflation is outpacing product inflation and we shall see more about that later. Now for the real stuff. For the month of December 2022, the US headline CPI inflation has come down sequentially from 7.1% to 6.5%; i.e. nearly 60 bps of tapering. The data was released late on Thursday by the US Bureau of Labour Statistics. This data point is important as it not only determines the global trajectory of rates but also largely is the key to what will happen in the Indian markets as well as in most of the other emerging markets.

Overall US inflation tapered by 60 basis points from 7.1% to 6.5% on the percent for the 12 months ending December; marking the lowest level of inflation since over the last one year and it would encourage the Fed to go easy on future rates hikes. However, it still looks likely that the Fed would hike rates by another 75 basis points, albeit in 3 tranches. If you look at core inflation (excluding food and energy), the index was just about up to a level of 5.7%. Core inflation had been sticky at around the 6% levels in the last few months.

The latest U.S. inflation data is likely to keep the global stock market rally on track. The data confirms that inflation is finally being tamed, although the target of 2% for inflation is still a long time away. However, the labour data remains strong and that is the reason the Fed is still hawkish since inflation is bound to go up. Initial jobless claims dipped to 205,000 which looks like a positive attribute of the market. However, economists and analysts are of the view that the labour market and inflation data will have moderated to a point where the hawkish tone of the Fed would have to be abandoned. However, rate cuts look unlikely in the month of December although future rate cuts cannot be ruled out.

There is one interesting development For instance, there is going to be a change in the way the US CPI is calculated in the months to come. Now the Bureau of Labour Statistics will try and improve the accuracy and usefulness of the CPI number and will change the weights involved. For now it looks like, despite the positive inflation data, the Fed is likely to be steadfast on its rate hike program. For now, 3 more hikes of 25 bps each looks to be on the cards, which is something the market has already factored in. For now, the US central bank is likely to go slow, after this inflation data. However, the US inflation target is 2%, which is still a long time away. The Fed has already clarified that it would not budge on rates till the time inflation showed a decisive move towards the 2% mark.