High inflation may well have been transitory afterall with it down now for the past six months to hit its lowest level in more than a year.
The Bureau for Labor Statistics said the Consumer Price Index (CPI) dropped 0.1% month on month and stood at 6.5% over last year for December, down from 7.1% in November.
This is the lowest rate of inflation since October 2021 with the fall in energy prices being the main contributor.
“The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes,” the Bureau said.
This adds to speculation that interest rates have probably peaked too with markets still expecting a 25 basis point hike at the beginning of next month, but the focus is now more on what happens after.
If inflation continues to fall, as many expect, then interest rates may soon be higher than the inflation rate which may well raise concerns about deflation.
Some therefore expect rate cuts later this year after a pause by the Federal Reserve Banks following the next meeting.
That’s in part because Fed has targeted a higher than neutral base rate. By definition that means at some point they have to get to at least neutral, which means they have to cut.
In addition, we are now in deflation and have been for some time. That’s based on monthly figures, which tend to be volatile, but have often been negative for numerous months.
Deflation is far harder to fight for Fed than inflation because Fed does not really have any tools to spur public demand for loans – new money.
They can buy stocks and bonds, but that goes to the investment class, rather than the public as such and inflation tends to be caused more by the public spending, rather than the better offs.
Concerns therefore may begin to rise about Fed having gone too high, but the economy has largely weathered it so far with GDPNow estimating there was 4.1% growth in Q4 2022.
That’s boom numbers, and a potential indication there have been structural shifts. Fed may therefore be able to afford its plan of tinkling with interest rates, rather than going back to mass printing.
It may be Fed thinks that commercial banks need an incentive to lend and since their profits come from interest rates, such rates need to be above zero.
A good number may be about 2%, maybe 3% at most, with the next coming months likely to focus on tweaking that number up a bit and down a bit rather than in one direction as we have seen so far.
This may translate to, rather than a recession, Fed is actually engineering a boom if commercial banks do print now that they can make money from loans to the public.
Overall therefore we may be getting out of the woods and may be about to enter the better part with huge economic growth so far seemingly having some staying power.
If that growth continues in the West, then bitcoin may benefit considerably because fundamentally this is commerce money, global commerce.
That grows, bitcoin’s usage should grow, and therefore its base floor should grow as there would be more non-speculative activity.
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- Source: https://www.trustnodes.com/2023/01/12/inflation-drops-further-to-6-5