Inflation in the United States has been a hot topic lately, with an accumulative increase of 2.3% just five years ago and an increased rate of 4.2% down to today’s rate of 2%. The rising prices of goods and services have many wondering if inflation has reached its peak, when it might decrease or if it could continue to rise even further.
To answer these questions, economists are crunching the numbers to determine what factors are at play that could be causing this shift upwards and downwards in the rate of inflation.
Many experts agree that the proper steps, like tax reform and a tighter labor market, could bring inflation back down and create a more steady economy for people living in the US.
The inflation trend in the USA
Since June 2022, inflation data has been declining in the United States. With the new release of Personal Consumption expenditure (PCE) reading coming out below expectations, it is believed that inflation has reached its peak in the country.
A PCE reading of 0.3% was expected, but the current reading was 0.2%, while over the past month, the indicator rose 0.5%. We clearly see a decline in inflation in the United States, but it is still too early to claim victory, as Jerome Powell said on Wednesday.
The PCE is the inflation indicator preferred by the Federal Reserve because it considers changes in people’s consumption habits. On the other hand, the CPI or Consumer Price Index only measures the price variation in a fixed family basket, which does not change items.
But even the CPI has been coming out lower than expected, and that is what has mainly supported stocks over the past couple of months. The Fed’s inflation target is 2%, and there is still some ground to go from the current 7.7% to reach that level.
That’s why there are fears that high prices are here to stay, as inflation is unlikely actually to return to 2%. Inflation may go down to 5% or 4%, but beyond that, it will be more difficult for it to continue going down. It must be borne in mind that after the pandemic, the world changed, and current measurements could be out of date.
Powell injects optimism into stocks
On Wednesday of this week, Jerome Powell, Chairman of the Federal Reserve, gave stocks in both the United States and Europe a lift with his comments regarding the rise in interest rates. For Powell, it is important to push the economy fairly to avoid entering a recession.
Powell also said that interest rates might rise slower than they have lately. The next increase in interest rates for this month of December could be 0.50% instead of 0.75%. That supports US stocks that are about to break out of the bearish territory.
The Dow Jones tried to break above 34,500 points, and although its bullish momentum slowed down a bit in that area, the short-term upward trend still holds. In addition, a golden cross has formed on the daily chart. The golden cross is confirmed when the 55-day exponential moving average crosses above the 200-day exponential moving average.
The gold cross pattern has bullish implications for the instrument in the medium term; therefore, the Dow Jones could continue to rise and reach the 35,000-point area. In such a case, the index would be leaving the bearish territory, rising more than 20% from its last minimum at 28,591 points.
The dollar weakens
With US inflation expectations lowered, the dollar accelerates its bearish momentum and falls further as the likelihood of more aggressive Fed rate hikes decreases. The dollar index falls to 104, 73, and its subsequent support could be at 104.00, where the 55-week exponential moving average is also. To the upside, the 200 EMA at 105.50 could act as resistance.
In 2023, the dollar rate is expected to be higher than it was in 2020 and 2021. Analysts predict the dollar rate will remain steady, but there could be a slight fluctuation due to several global economic factors.
The stock market, political volatility, inflation, GDP growth, and international trade relations are among the many economic forces that could influence how the currency performs throughout the year.
As such, investors should remain vigilant if they plan on trading in foreign currencies, as any sudden changes may make or break their strategies. With careful observation and intelligent decision-making, savvy traders can take advantage of the trend in 2023 and benefit tremendously from these shifts.
