US Inflation Eases in December 2023: Wage Growth Slows, Markets Rally

In December 2023, wage growth in the US came in below expectations, providing a boost to both stock and bond markets as inflation signals softened.

After reaching peaks not seen in four decades, inflation has begun to retreat. From June through November, the Consumer Price Index (CPI) rose at an annualized rate of just 2.5%, slightly above the Federal Reserve's 2% target, marking a significant slowdown from the double-digit inflation rates earlier in the year.

This deceleration is largely driven by falling prices in energy, grains, plastics, lumber, and shipping costs, which have all contributed to easing overall inflationary pressures.

Highlights:

• US inflation has cooled, with consumer prices increasing at an annualized 2.5% rate since June 2023.
• Key commodity prices, including energy, plastics, and lumber, have declined, alongside reduced shipping expenses.
• December's jobs report revealed moderated wage growth: average hourly earnings rose 0.3%, while weekly earnings decreased.
• Federal Reserve officials remain cautious, signaling possible further interest rate hikes despite positive inflation data.
• Bond markets rallied amid optimism that the Fed is successfully avoiding stagflation.

Despite these positive signs, Federal Reserve leaders emphasize ongoing inflation risks and their commitment to maintaining tight monetary policy. Having increased benchmark interest rates from near zero to almost 4.5% during 2023, they continue to prepare markets for potential additional hikes to keep inflation expectations anchored.

Consumer sentiment remains wary, with 65% of respondents in a recent Gallup poll anticipating high inflation in 2024. Lower-income households, in particular, continue to feel the impact of rising costs for essential goods, even as fuel prices have dropped significantly. Meanwhile, financial markets focus on recent encouraging data, treating last year's inflation surge as largely behind them.

Market indicators reflect this optimism: inflation breakeven spreads have tightened, and Treasury yields have declined. The 10-year Treasury note yield fell from 3.88% to 3.57% in the first week of the new year, while the S&P 500 gained 2.3% on the last trading day.

Investors welcomed the December report showing average hourly earnings increased by 0.3%, below the anticipated 0.4%. Additionally, November's wage growth was revised down from 0.6% to 0.4%, reducing the year-over-year wage increase from 5.1% to 4.6%. Average weekly earnings have also dropped for three consecutive months due to shorter workweeks.

Federal Reserve Chair Jerome Powell has highlighted core services inflation—excluding housing—as a critical factor, noting that wages are the largest cost driver in this sector. November data showed a slowdown in service price increases, rising only 0.1%, down from 0.4% in October and 0.8% in September, indicating easing price pressures.

While concerns remain that rising prices could trigger a wage-price spiral reminiscent of the 1970s stagflation, today's reduced union influence and weaker collective bargaining power make such a scenario less likely.

However, risks persist. A strong labor market may continue to push wages higher to fill record job vacancies, and China's reopening after prolonged COVID-19 restrictions could increase demand for commodities, potentially driving prices up.

IMF Deputy Managing Director Gita Gopinath cautioned that US inflation has not yet "turned the corner," citing the robust job market as a key risk factor.

Until further data confirms a sustained downward trend, financial markets are likely to continue pricing in persistent inflation pressures.

Discover the latest news and current events in Markets News as of 11-01-2023. The article titled " US Inflation Eases in December 2023: Wage Growth Slows, Markets Rally " provides you with the most relevant and reliable information in the Markets News field. Each news piece is thoroughly analyzed to deliver valuable insights to our readers.

The information in " US Inflation Eases in December 2023: Wage Growth Slows, Markets Rally " helps you make better-informed decisions within the Markets News category. Our news articles are continuously updated and adhere to journalistic standards.