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BLS releases headline CPI inflation report today for January 2023

Commentaries & Views

Traders and investors have been patiently waiting for today’s inflation report to glean information on whether or not the Fed will maintain its current monetary policy or adjust it to a somewhat looser policy. The report came in very close to estimates and did indicate that inflation is continuing to diminish. However, the increase in headline inflation at 0.5% was the biggest month-to-month increase since June 2022.

The report indicated that headline inflation (including energy and food costs) declined for the seventh straight month. January’s numbers came in at 6.4% year-over-year which is a month-over-month increase of 0.5%.

I believe the biggest takeaway from today’s report was that when combined with the last jobs report that was exceedingly robust it gives the Federal Reserve the ammunition to continue its aggressive monetary stance because today’s report and the jobs report last week indicate that the strength of the economy is such that it can handle recent rate hikes by the Federal Reserve.

Some analysts including myself believe that soon inflation reduction will become more difficult than it has been in the past. Those analysts are anticipating that at some point inflationary pressures will become more persistent and harder to tame. Another issue is that the Federal Reserve cannot alone solve the problem because the administration is the political body that sets the budget and continues to increase the national debt by spending more than before and most importantly increasing the national debt.

Another takeaway from today’s report is that it is highly probable that the Federal Reserve will raise rates again in March. According to the CME’s FedWatch, the probability of a ¼% rate hike at the next FOMC meeting is 90%. If there is any sunshine or bright news to today’s report it is that I believe that it will be highly likely that the Federal Reserve will raise rates by ¼% next month but then pause because there is an intrinsic time lag between a rate hike and seeing how that affects the economic contraction that is the goal of the Federal Reserve to reduce inflation.

Gold futures basis the most active April contract is currently trading at $1.30 higher and fixed at $1864.80. Dollar neutrality neither helped nor hindered today’s move in gold. But the fractional upside move indicates that today’s report has not dramatically changed market sentiment for gold and most likely will not be the single factor that results in a key reversal from the bearish market sentiment currently to bullish market sentiment.

My last concern is the fact that the revision for the December inflation report revealed a different picture and outlook and that raises the question as to whether or not the numbers released today are going to have a similar revision further down the road.

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Wishing you as always good trading,

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