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Rise weakens further: US inflation could send Fed interest rate policy on the home straight

increase continues to weaken
US inflation could send Fed rate policy down the home stretch

For the sixth time in a row, the price increase in the US falls. The first analysts already see the target of two percent within reach by the middle of the year. This could then mean the end of interest rate hikes by the Fed.

The rise in prices in the United States continues to weaken, giving the central bank scope for a less aggressive interest rate policy. The inflation rate for goods and services fell to 6.5 percent in December from 7.1 percent in November, the Washington Department of Labor said, in line with expert forecasts. It is already the sixth drop in a row and fuels hopes that the wave of inflation is abating.

“The decline in the inflation rate was not a flash in the pan and will continue. In June, the two in front of the decimal point could appear again for the first time in more than two years,” said economist Bastian Hepperle from Hauck Aufhäuser Lampe Privatbank. This would bring the rate of inflation closer to the mark that the Federal Reserve has set as the target for price stability.

In December, the central bank raised the key interest rate by half a percentage point to the new range of 4.25 to 4.50 percent. The monetary authorities meanwhile see considerable progress in curbing inflation and want to steer a less aggressive course. On the futures markets, the inflation data reinforced expectations that the Fed would only raise interest rates by a quarter of a percentage point in early February.

“The inflation trend is a real blessing for the Fed,” says VP Bank chief economist Thomas Gitzel. The key interest rates had been increased significantly in the past year, and now the inflation rates are clearly falling. “A central bank could hardly wish for more, even though the Fed’s influence on the development of inflation has so far been rather small.” The decline in inflation rates is mainly due to lower energy prices and special corona effects.

Gitzel expects the Fed to raise rates by 25 basis points at each of the next meetings, but will refrain from further rate hikes from May onwards. “By that time, the key interest rates will be above the inflation rate. A positive real key interest rate should mark the end of the monetary tightening cycle,” he calculates.

Investors took the inflation data with caution. European stock exchanges trimmed their gains. The DAX and the EuroStoxx50 were up around half a percent after gains of almost one percent before publication. The futures for the most important US indices, on the other hand, went in search of direction and were between 0.2 percent in the red and 0.2 percent in the plus.

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