Stansberry Research

CPI Data Implies Rate-Hike Cycle Couild End Soon

C. Scott GarlissStansberry NewsWire

Price growth is plummeting...

Since the second half of 2021, there has been one word that has dominated every investing conversation: inflation. This word is paramount to deciding whether to buy risk assets like stocks or safety assets like bonds. After all, the Federal Reserve bases its interest-rate decisions on the swings in price growth.

You see, if prices are rapidly rising, it means the U.S. dollar is losing value. That destroys everyone's disposable income. In other words, their ability to consume more goods is greatly diminished compared with what it was previously. So, considering the median American income is around $55,600 and the same measure for households is just over $75,700, there's little room to spare if costs are rising 9.1% annually.

So, the Fed has little choice but to raise interest rates. It has to create more buying power for the greenback. That way prices can stabilize, and households can better budget their incomes. Economic output will then follow suit, diminishing the need for more increases and even lead to rate cuts.

And recent inflation data tells us the central bank can stop raising interest rates sooner than later...

The U.S. Bureau of Labor Statistics' ("BLS") Consumer Price Index ("CPI") data for December rose 6.5% year over year ("YOY") compared with Wall Street's expectation for a 6.5% increase and the prior month's 7.1% gain. On a month-over-month ("MOM") basis, it contracted 0.1% compared with the expectation for a 0.1% slide and a 0.1% bump in November.

Today's annual inflation rate marked the sixth consecutive month where the number has remained below the June peak. It's also the lowest figure since October 2021. If we annualize the monthly run rate out over the next 12 months, that would be a 1.2% YOY cost contraction.

But let's be a bit more realistic. Let's look at the average rate of monthly growth over the past three months. That number shows a 0.1% monthly gain. So, cost growth would be more around 1.2% annualized. The pace is far below the current rate.

And while today's numbers were in line with Wall Street's expectations, they tell us the central bank is having success in its fight against inflation. The change should give the Federal Reserve room to slow the pace of interest-rate hikes going forward. In fact, if the current run rate of monthly growth keeps up, the central bank could hit the pause button on rate hikes as soon as March...

As for the core CPI, it rose 5.7% YOY compared with the expectation for a 5.7% increase and November's 7.1% gain. The same number jumped 0.3% MOM compared with the estimate for a 0.3% rise and the prior month's 0.2% climb. Check it out...

The core numbers are still high, but the move lower compared with the prior months is a positive development.

What sticks out even more here is the core MOM data on an annualized basis... The current run rate implies 3.6% YOY, which is much lower than the headline reading.

The core number is important because that's the number the Fed is paying the most attention to compared with the headline numbers. So, if this trend continues, that means there's more room for core inflation to drop even more.

It took us 26 months for inflation to peak... And it's likely to take at least 12 months to see a sustainable shift lower. But the trend is heading in the right direction.

The rate-setting Federal Open Market Committee meets from January 30 to February 1. Policymakers have said they want to see interest rates reach between 5% and 5.25% by early this year. That's an increase of 75 basis points from the current 4.25% to 4.50% range. Once they get to their target level, the plan is to stop raising rates. Nothing in today's inflation numbers will change the objective.

At the end of the day, we're closer to the Fed's interest-rate target than we were back in March. The sooner we get there, the better it will be for the long-term outlook for the economy and the S&P 500 Index.