Truflation US Data Insights: January 2023

As the new year kicks off, inflation in the US has continued to slow for the sixth month in a row, while the Federal Reserve’s aggressive rate hikes are beginning to have a cooling effect on the labor market. As a result, US stocks started the year on a positive note, with all major indexes staging a rally in the first week of 2023.

However, while markets are cheering the ‘Goldilocks’ jobs report in the hopes that the economy is slowing down, the labor market remains tight. Data released by the U.S. Labor Department on Friday showed an increase of 223,000 jobs in December, and the unemployment rate edged down from 3.7% to 3.5%. This matches a 50-year low as the US added 4.5 million jobs in 2022 and the economy continues to heal. This, coupled with employment rising, means we are seeing wage growth slowing, falling to 6.2% compared to  6.7% the previous month.

Meanwhile, inflation remains well above the central bank’s target, which is likely to result in the Fed continuing to tighten monetary policy for the time being.

With this in mind, let’s take a deeper dive into the US inflation figures based on Truflation data. The US Truflation CPI continued to fall throughout December, sitting at 5.7% as of January 7, 2023, down from 6% on December 8, 2022.

This decline was led by the following categories:

• The Utilities category saw a slowdown in price rises over the past month, with the index 1.8% lower versus the previous month and down 2% versus the previous quarter.

• The Housing category also saw a slowdown in price growth, down 0.2% from the previous month and 1.7% from the quarter before. As mortgage costs in the US continued to rise due to higher interest rates, house prices saw a sharp decline in November. On a monthly basis, US house prices dropped 0.2% and are forecast to continue falling later in the year.

• The rate of price increases in the Transport category also continued to drop in December, down 1.3% versus the previous months and 7.7% versus the previous quarter. This category contributes 19.8% to the total value of the overall US CPI rate. In particular, oil prices continued to slump amid an uncertain global economic outlook. Meanwhile, gas prices hit a 15-month low in December.

However, despite inflation cooling down and hopes for a soft landing to stoke investor sentiment, economic indicators remain mixed. Here’s an overview of the latest releases and indicators:

• While the number of new jobs added in the US slowed from an average of 539,000 positions in the first three months of 2022 to 223,000 in December, the report still came in above analysts’ expectations, and the unemployment rate has dipped to a pre-2020 low of 3.5%.
• The average hourly earnings continued to rise month-on-month, but the increase was slower than in the previous monthly report (0.3%, down from 0.4%). This lowered the year-over-year wage increase figure to 4.6%, down from 4.8% in November and marking the smallest rise since August 2021.
• The health of the US manufacturing sector continued to decline in December, according to the latest S&P Global US Manufacturing PMI. The index fell to 46.2 from 47.7 in November, signaling the fastest decline in operating conditions since May 2020 and among the sharpest since 2009.
• US consumer confidence rebounded sharply in December following several monthly declines, based on data from the Conference Board. The Consumer Confidence Index rose to 108.3 in December from 100.2 in November, while the indexes for consumers’ assessment of current business and labor market conditions, as well as their expectations for income, business and labor conditions, have also seen marked improvements.
• US Personal Consumption Expenditure (PCE) inflation continued to decline in November, down to 5.5% from 6.1%. The core PCE – a measure that excludes food and energy and is favored by the Federal Reserve – was also down to 4.7% in November from 5% in October.

As economic data remains mixed, the Federal Reserve can be expected to continue raising rates in its next policy meeting, albeit at a slower pace than in 2022. December already saw a slowdown in rate hikes from 0.75% to 0.5%. The market expects January’s rate increase to be smaller still at 0.25%.

Source: Federal Funds Rate History 1990 to 2022 – Forbes Advisor

Truflation is betting that the Federal Reserve's aggressive monetary campaign managed to slow the consumer price growth in December. On Thursday, the US Bureau of Labour Statistics (BLS) will release its consumer price index report. Truflation forecast models predict the reported inflation figure to go from 7.1% in November to 6.4-6.5% in December, in line or slightly below market consensus and another significant drop since September 2022.

At the same time, the community model, which also uses Truflation data and assumes that the official CPI is three months behind, predicted the US December YoY inflation at 6.8%, which would place it well above the market expectation potentially rattling the markets.

Oliver Rust, Truflation's Project Lead and Data Expert, said: “While inflation continues to cool, the labor market remains tight as recession fears seem to have subsided for the time being. As such, we don’t expect the Federal Reserve to relax any time soon, though we foresee a slowing of interest rate increases going forward.

In its next meeting between January 31st and February 1st, we expect the Fed to increase the federal funds rate again by 50 basis points to 4.75%-5%. With economic data remaining mixed, the coming months will reveal whether the US can truly avoid a recession.”

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