Inflation: Is the end in sight?

The US was the first major economy where inflation took root, as a wave of pandemic relief money from the government set off a boom in activity and spending. The inflation then went global. When the US central bank started raising interest rates to fight the problem, it triggered a rush of money into the country, making dollar strong and other currencies weak. This then sparked another round of Global inflation.

It is finally easing. The US headline annual CPI rose 6.5% in December, down from a 7.1% gain in November, on a monthly basis, the CPI declined 0.1%. The latest year-over-year figure was down from 7.3% in November and from a recent peak of 11.7% in March.

The US Fed began raising interest rates starting in March 2022. The FOMC has now raised rates seven times in the past 10 months, reaching total of 4.25%. After the Fed dialed back the pace of its rate hikes from 75 basis points (bps) to 50 bps in December, Thursday’s CPI reading increased the chance the Fed will opt for only a 25 bps rate hike at its upcoming meeting that concludes on Feb. 1.

According to CME Group, markets are currently pricing in a 77.3% chance of a 25 bps rate hike in February, which would bring the target fed funds rate to between 4.5% and 4.75%. The market is also pricing in a 79.5% chance the Fed will continue to raise rates by at least another 25 bps in March. We might be entering the end-game of this fight!