Disinflation Or Disillusion? The Answer Maybe In January’s PCE Inflation Data

Inflation Data Is the Key

What a difference a month makes. The New Year began with a bout of optimism that the chapter of record high inflation was finally coming to a close after U.S Consumer Price Inflation fell to its lowest level in more than a year.

But that optimism quickly evaporated as the reality of hot inflation once again resurfaced following surprising strength in hiring, wages and consumer spending – suggesting that the economy isn’t slowing down anything like as much as many had thought.

While inflation has retreated from a peak of 9.1% notched in June, there are still signs of underlying price pressures in the economy. Gas prices are up from one month ago. Core inflation, which excludes food and energy, remains stubbornly high. And last week, the Producer Price Index, which is regarded as a leading indicator of where Consumer Price Inflation is headed in several months’ time, rose 0.7% last month from December – well above what economists expected.

All of that comes despite the most aggressive interest rate hike campaign by the Federal Reserve since the 1980s. Policymakers have lifted the federal funds rate eight consecutive times to a range of 4.5% to 4.75% from near-zero in March 2022.

Traders are now pricing in the possibility of the Fed Funds rate hitting 5.25% to 5.50% in 2023. There is even a strong chance that rates could reach 6% by year end, which would be the highest since 2000.

The big question now is how high will interest rates go in 2023? And how long will they stay there?

Looking ahead, the answer to that question may come from the Fed’s preferred measure of inflation – PCE Inflation data, due for release on Friday. The outcome of the data will ultimately play a very influential role in the size of the Fed’s next rate hike decision.

Fed officials will assess the data as they decide on their next policy move. Having stepped down to a 25 basis point rate increase this month – following a string of 75 basis-point and 5 -basis point rate hikes last year – the central bank is once again under pressure to rein in inflation by making a return back to “jumbo-size” rate hikes.

Commodity Price Forecast for February 24, 2023

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