US Inflation Falls to Lowest Level in Two Years, increasing Market Optimism

Lorenzo Bagnato

12 April 2023 - 15:37

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American inflation fell to an optimistic 5% year on year. Nevertheless, the Federal Reserve is not satisfied and might still increase interest rates.

US Inflation Falls to Lowest Level in Two Years, increasing Market Optimism

Inflation news from the United States brings back the level of optimism about the economy typical of early 2023. US inflation fell to 5%, falling below core inflation levels for the first time. This lowers chances that the Federal Reserve will increase interest rates again in the next meeting.

On Wednesday, inflation data for March in the United States was finally released. It showed a steep fall in inflation, a 1% decrease year on year from 6% to 5%. The American target point for inflation is 2%, still far away but not completely unreachable. Indeed, 5% is the lowest level American inflation reached in two years.

To date, this is the biggest reassurance that the Federal Reserve’s strategy to increase interest rates is working. Since last March, the Fed has hiked rates by half or three quarters of a point. In January and March, the Fed increased interest rates once again, though by only a quarter of a point.

These hikes were putting heavy pressure on the global economy, as tight monetary policy couldn’t allow banks to repay debt on their assets. Stock markets plummeted, signaling an incoming recession.

When last month Silicon Valley Bank and Signature Bank collapsed, followed by a crack in major European institutions too, it seemed a recession was inevitable. Luckily, they were revealed to be just “a few bad apples” and the overall banking system held.

With today’s inflation data, stock futures went on a rise, showing overall optimism in the market.

Core inflation meaning

Nevertheless, the picture is not all too bright. Core inflation, which is an inflation index that excludes food and energy prices, is still on the rise. In fact, for the first time, core inflation is higher than general inflation, a data that worries central banks.

Core inflation in the USA increased by 0.4% since February, sitting today at 5.6% year on year. This means that, for example, housing prices are still rising.

Core inflation is the main measure used by the Federal Reserve to make decisions on interest rates. Because core inflation is still increasing, the Fed might be forced to raise interest rates once again to stop it.

If interest rates keep rising, it is extremely likely that a recession will eventually happen. To know for certain, we must wait for GDP data in the first quarter of 2023.

At the moment, there are speculations on both sides. Certainly the fall in inflation is good news, but not good enough to put fears of recession away.

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