What’s going on here?
US core inflation rose 2.6% from a year ago in May, landing within touching distance of the Federal Reserve’s (the Fed’s) elusive target.
What does this mean?
Headline inflation stayed the same from April’s release, marking the first month without an increase this year. Although, the most important number for the Fed is core inflation, which excludes volatile food and energy prices. That was up only 0.1% last month, and 2.6% compared to last year. In other words, it’s getting closer to the Fed’s 2% target. Still, it’ll take a long time for Americans to let their guards down: even though their average take-home income rose a better-than-expected 0.5%, consumer spending was lower than expected.
Why should I care?
For markets: The scissors have child-lock on.
Despite this promising data, traders still doubt that interest rates will be cut at the Fed’s next meeting in July. Instead, they’re predicting a 60% chance of a cut in September, with maybe another one before the year’s end. Remember, too, that the Fed won’t act until it sees a sustained pattern in the numbers. And even with rates at a 16-year high, the economy and stock markets have stayed stronger than most expected. So for the Fed, there’s no need to rush.
Source: US Bureau of Labor Statistics
The bigger picture: A world wide web.
The higher a country’s interest rates, the more investors tend to flock toward its currency. So the US dollar is basking in glory these days, leaving the currencies of countries with lower rates – like Japan – to watch with envy. Higher rates haven’t been kind to emerging markets, either. They often borrow in US dollars, so their payments bump up when the greenback strengthens. That said, the US hasn’t gotten off scot-free: companies that rely on debt are feeling the pinch from higher borrowing costs – we’re looking at you, private equity and real estate.
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