#1 CPI Decline Leads to Drop in Treasury Yields and Challenge for Tech Stocks

Overview of current CPI inflation rate

Inflation, measured by the Consumer Price Index (CPI), in the United States has fallen to its lowest level in over a year, driven largely by a sharp drop in energy prices. According to the US Labor Department, the CPI was 6.5% over the 12 months to the end of December, down from 7.1% in November. This marks the sixth consecutive month that the pace of inflation has dropped, and some items such as oranges and bananas even saw outright price falls in December compared to November. The overall drop of 0.1% in prices was driven by a fall in petrol prices.

Impact on consumers

This is welcome news for consumers as it means they will have more “breathing room” and a break from the cost-of-living pressures. However, analysts have noted that the price relief is not spreading to other items as quickly as they had hoped. Clothing prices, for example, rose 0.5% from November to December, and were up 2.9% compared to a year earlier. This suggests that goods deflation is not broadening out as quickly as expected.

The fight against inflation, measured by the CPI, has been a major concern for authorities in the US. Inflation took off in 2021 as the economy roared back to life after pandemic lockdowns and companies facing shortages and rising costs hiked prices. The war in Ukraine, which hit food and energy supplies, made the problem worse, sending inflation to 9.1% in June – the highest rate in more than four decades.

Efforts to combat CPI inflation

The US central bank, the Federal Reserve, responded last year by raising interest rates at the fastest pace in decades, in an effort to try to return inflation, measured by the CPI, to the 2% rate it considers healthy. Federal Reserve Chairman Jerome Powell said last month that the bank would start to move less aggressively to see how the moves are playing out in the economy. By boosting borrowing costs, the Federal Reserve is expecting to dampen demand for expensive items such as homes and cars, helping to slow the economy and ease the pressures pushing up prices.

However, this fight is also closely watched as the slowdown from higher rates also risks tipping the world’s largest economy into a recession. Thursday’s report from the Labor Department showed prices for petrol were 1.5% lower in December compared to a year earlier. Costs for used cars and trucks also fell 8.8% year-on-year.

The report has been described as a “little underwhelming” by Seema Shah, chief global strategist at Principal Asset Management. She said that while evidence is building that inflation, measured by the CPI, is cooling and will continue to do so over the coming months, the real question will come in late Q2 as inflation tries to move below the 4-4.5% handle. If it plateaus there, the Fed will have very little space to cut rates this year and markets will face renewed challenges. And if it falls steadily through that threshold due to growing economic weakness, permitting Fed loosening, markets will still be challenged due to earnings concerns.

Treasury yields fell on Thursday as investors digested the key inflation report that showed a small decline in price pressures. The yield on the benchmark 10-year was down by about 5 basis points at 3.508%. The 2-year Treasury yield was trading nearly 6 basis points lower at around 4.17%. Yields and prices move in opposite directions and one basis point equals 0.01%.

Conclusion and future considerations of the CPI.

In conclusion, the recent drop in inflation, measured by the CPI, is welcome news for consumers as it means they will have more “breathing room” and a break from the cost-of-living pressures. However, analysts have noted that the price relief is not spreading to other items as quickly as they had hoped. The Federal Reserve’s fight against inflation, measured by the CPI, is closely watched as the slowdown from higher rates also risks tipping the world’s largest economy into a recession. The drop in inflation has also led to a decrease in Treasury yields, which could have a ripple effect on the economy as a whole.

It is important to note that while the drop in inflation, measured by the CPI, is a positive development, it is still well above the Federal Reserve’s target of 2%. This means that there is still a long way to go before inflation is fully under control. The Federal Reserve will continue to closely monitor the inflation rate, measured by the CPI, and make adjustments to interest rates as necessary to keep inflation within their target range.

In addition, it is important to note that while the drop in energy prices has contributed to the overall decrease in inflation, it is not the only factor. The Federal Reserve will also consider other indicators such as wages and labor market conditions to make decisions on interest rates.

Overall, the recent drop in inflation, measured by the CPI, is a positive sign for the economy, but the Federal Reserve will continue to closely monitor the situation and make adjustments as necessary to maintain stability and keep inflation within their target range.

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