Staying afloat target
The U.S. economy reported its headline inflation rate at 3.1% YoY for Jan-2024. Although lower than 3.4% YoY for Dec-2023 and 6.3% for Jan-2023, the reduction was below expectations. Market has been earnestly eager for inflation to cross below the 3% mark, which would signal a major improvement in inflationary conditions. On a MoM basis, headline inflation took a horizontal stand at 0.3% MoM (compared to 0.3% in Dec-2023 and 0.5% in Jan-2023). Thus, whether we look at inflation on a monthly or annual evolution, a marginal improvement is the nest judgement there is. YoY and MoM core inflation stood at 3.9% and 0.4% respectively in Jan-2024 compared to 4.0% and 0.3% in Dec-2023.
Looking at these numbers, inflation continues to remain sticky in the U.S. and its remains a difficult variable to forecast. The upside risk remains higher food prices, increasing cost of production, wage growth and new fiscal stimulus. However, there is still room for inflation to slow down since interest rate remains elevated, but markets will likely tone down inflation expectation over the next 2-3 months. I expect that the Fed will maintain their stance of commencing the rate cut campaign by mid-2023 as inflation embraces a topsy-turvy movement. From a political perspective, the latest inflation numbers are bad news for Joe Biden as the economy dusts up odd lots against him. Unfortunately, political strategies are not so potential in taming inflation.
The big question is has inflation ever deterred consumption? Would consumer stop eating and drinking because inflation is resilient? It is more unlikely than not. Consumers will likely continue to draw more on their existing credit cards, with others taking on new ones. Depending on how early inflation metrics cross below the 3% mark, higher demand for consumer credit could result in stricter application condition for new credit.