The price of crude oil has been rising for the past several days, but its gains have been short-lived. Investors digest the buildup in US crude supply, the reopening of the economy and the prospect of cooling wage growth. Ahead of key consumer-inflation figures on Thursday, the markets are cautious.
The US CPI is predicted to show a slowdown in year-to-year growth, while food prices are expected to show a spike. Consumer staples, which have been strong in recent months, are expected to fall in December. Economists expect the headline CPI to be at a higher level than the November figure. It is still expected to climb at a slower rate than it did in September.
While the headline CPI number is expected to be soft, the core CPI will rise more quickly. This is because the index strips out volatile food and energy prices. However, even without oil, the CPI shows that inflation slowed to just 0.1% in the month of November. In the last 12 months, the CPI has increased by 6.5%.
Gasoline is expected to drop in December, which could mean that consumers could see a windfall at the pump this holiday season. Prices could also be much cheaper in January and February. The national average is expected to be below $3 per gallon by the end of the year. But the biggest question is whether the Fed can keep rates low for long.
As the US economy slows, demand for oil is forecast to pick up. However, the market is largely tuned to the Consumer Price Index (CPI) for the American consumer, rather than the broader energy index.
Analysts expect the core CPI to rise at a slower rate than the headline figure, which is expected to show an increase of 5.7%. It is still expected to be higher than the 12% it rose in April. Traders are expecting a slowdown in wages, but not enough to cause the Fed to raise rates any time soon.
In addition, economists are not optimistic about a double-whammy of recession and high inflation. They expect the year-to-year rate of increase for the CPI to slow sharply by summer of 2022. Even though the oil price hasn’t dropped yet, the 12-month rate of change in oil price inflation will continue to fall, reaching a new low of minus 7% by October.
Oil is one of many commodities that has surged in the year since Russia’s invasion of Ukraine. However, this surge was offset by concerns that the global economy would suffer from a recession.
Despite the upbeat mood ahead of the US CPI data, the market has been hesitant to take the next big step. Expectations of a slowdown in inflation are a key catalyst for traders. Whether or not the Federal Reserve will raise rates in record-time, the next big catalyst for investors will be GDP data on Friday.
The Federal Reserve’s efforts to bring decades-high inflation under control are working. Investors are digesting the fact that the Fed has a lot of tools at its disposal. Nonetheless, the fear of the unknown is not going away.
