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Inflation rises 7% over the past year

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The US December Consumer Price Index (CPI) continued to increase, signaling that inflation isn’t showing any sign of slowing down.

The headline inflation rose to 7% year-on-year, the highest level since 1982, and the core figure hit 5.5%, the biggest growth since February 1991. Both data were well above what is considered a target level for central banks – around 2%. Note that interest rates were above 8.5% in 1982, while at present, the Federal Reserve maintains its ultra-expansionary monetary policy, keeping reference rates at 0%.

Indeed, the Fed has already pointed towards more restrictive policy changes, including ending its bond-buying program and increasing interest rates this year.

If inflation continues to increase or remains at current levels, real interest rates will likely stay in the negative territory, providing an extraordinary stimulus to the economy. However, it could still not be enough to prevent an inflationary spiral that can carry over to wages. For this reason, the market had expected greater determination in Powell's statements, especially concerning the reduction of the Fed's balance sheet. However, there is still the possibility they will reconsider it in the following meetings before the first hike expected to occur in March.

Time to look ahead to the Producer Price Index

The PPI report scheduled to come out today could also exceed previous levels. However, after the market's reaction to the CPI figure, today's data should not have a major impact.

The financial markets reacted differently to inflation news.

Despite the historically high CPI data that should lead the market to anticipate more aggressive rate hikes, the 10-year bond yields continued to fall, down to 1.73%. The stock markets registered modest gains, seemingly ignoring the high inflation threat to the economy. The US dollar weakened significantly against its competitors.

EUR/USD decisively broke the 1.1380 resistance that has not been overcome since mid-November and was heading towards the next reference zone located at 1.1512, through which the 100-day moving average passes.

GOLD remained at the high levels recorded in recent days without exceeding the important 1831 price hotspot zone. Precious metal traders seem to be among the few still unsure about Fed's take on inflation.

Sources: Bloomberg Reuters.

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.