Markets Rally As US Inflation Slims Ever So Slightly

Markets Rally As US Inflation Slims Ever So Slightly
Stéphane Renevier, CFA

over 1 year ago2 mins

Key US inflation data came in much better than feared, and sparked a markets rally as investors anticipated a less-aggressive cycle of rate hikes from the Fed.

The US consumer price index (CPI) showed the annual inflation rate had cooled to a still red-hot 8.5% in July, down from 9.1% in June. That was better than the 8.7% the market was expecting, and offered some hope that the sky-high price pressures might finally be on their way down. But the core inflation rate – the one that strips out the more volatile food and energy prices – actually rose slightly, to 5.9%. While that was also less than the market feared, it underscores the tough job the Fed has ahead of it as it seeks to tamp down the country’s inflation with a series of aggressive rate hikes.

Bonds and stocks both soared on the inflation news, as investors figured this would perhaps lead to fewer rate hikes from the Fed. And that’d be good for stocks and bonds, because lower interest rates boost the present value of their future cash flows (and lower inflation makes them even better in real terms). What’s more, it’d all be good for the economy, since slower inflation might also finally give consumers some relief.

So there’s a lot of new optimism in the markets, but you may want to still be cautious with your investments here. While this news is certainly encouraging, there’s no guarantee that inflation will fall to a level low enough to convince the Fed to take its foot off the gas on rate hikes. Sure, the market is now expecting the Fed to be more relaxed, but with the central bank’s 2% inflation target still a long way off, it just might keep on going with those hikes. In fact, the more markets rally and the more confident consumers become, the more pressure there’ll be for more hikes…

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