Inflation trends

The Federal Reserve’s recent announcement to hold short-term interest rates at 5.25-5.5% was well received by the markets this past week and was clearly influenced by inflation trends. After the S&P 500 recently fell into a “correction”, defined as a 10% drop from a recent peak, the index returned over 5% last week. In this post, we highlight recent inflation trends towards lower rates and note that there is still some work to do to reach the Fed’s target inflation of 2%.

Inflation over the last 12 months

According to Statistica.com, the 12-month inflation rate was 3.7%. As the chart below shows, this is a significant reduction in peak inflation of over 9% in June 2022. This reduction was largely due to seven quarters of increasing short-term interest rates, which should reduce economic activity by increasing borrowing costs. But, the Fed also has a mandate to keep unemployment low.

Unemployment and a soft landing?

Unemployment has stayed low, as the next chart shows.

It is our opinion that the Federal Reserve appears to be close to reaching its goals of low unemployment and inflation. And, this all appears to be happening without triggering a recession. Our final chart shows GDP, which when its rate is negative for two quarters, is the official trigger for a recession in the U.S. As this WSJ article notes, the U.S. economy is “Improbably Strong”.

We conclude from these macroeconomic indicators that the U.S. economy, inflation, and unemployment appear good for now. With the year nearly over, we will see very soon how consumer sentiment and consumer spending around the holidays may influence these indicators.