Oil Prices Rise as U.S. Inflation Falls to 6.5%

U.S and Canadian stocks were up in the second week of January after it was reported that U.S. inflation fell for its sixth consecutive month. Oil prices climbed more than a dollar per barrel, extending a recent streak of gains, on growing investor optimism that inflation was on its way down. Oil prices are also being juiced by the fact that China is reopening its economy following strict COVID-19 curbs.

What Is the Inflation Rate in the U.S?

U.S. inflation cooled in December, dipping 0.1%, to 6.5%, a big drop from November’s 7.1% reading. This suggests the Federal Reserve’s rising interest rates are having a sustained effect on inflation. The big question is whether inflation will continue to fall to the Federal Reserve’s two percent target, or whether inflation will plateau above that level.

Despite the positive signs, the actual data is a little mixed. Much of the retraction in December’s inflation reading was a result of falling gas prices. Goods prices also declined month-over-month, down 0.3%, with the cost of both new and used cars falling.

Not everyone owns a car, though. Growth in food costs at grocery stores and restaurants is slowing down, with the food index up 0.3% in December. In November, it rose 0.5%. Despite the slight tick downward, grocery costs are still rising at an annual pace of 11.8%.

Outside of these two categories, price growth remains robust and continues to accelerate. This presents major obstacles to the U.S. Federal Reserve who has said it will continue to raise its overnight lending rate in 2023. This is expected to tame inflation but it could also break the economy. On the other hand, if the Fed lets up on rate hikes too soon, it risks having inflation plateau at a pace above its annual target, which could also put additional strain on consumers.

Still, falling inflation is an encouraging metric and shows it is moving in the right direction. A soft landing for the U.S. and Canadian economies, coupled with a strong rebound in China, could mean the global economy fares better than originally thought in 2023.

This is positive news for Canadian stocks. Financials, which is the largest component, accounts for 30.6% of the TSX with commodity stocks coming in second at 19.10%.

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U.S. inflation fell for the sixth straight month in December, suggesting the Federal Reserve’s aggressive rate hikes are working. The downward trend is not broad based, there are still some areas of the economy that are heating up. Whether this means the U.S. Federal Reserve or even Bank of Canada will continue their supersized rate hikes is open for debate. Regardless of what the central banks do, the trading experts at Learn-To-Trade.com can teach how to trade more confidently and profit more consistently.

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