Today, the consumer price index in the USA for January is expected to be published at 15:30 Israel time. Bloomberg estimates suggest that the rate of inflation in the American economy will continue to decrease, with an expected annual rate of 3.1% and a rate of 3.7% in the core index that neutralizes seasonal components.
Fed Governor Jerome Powell’s recent remarks led to a drop in the markets’ expectations for an immediate interest rate cut, increasing interest rate expectations for the first cut in May. The markets are hopeful that upcoming inflation data will moderate the central bank’s hawkishness.
“The rate of price increase in the US is slowing down and moving in the right direction”
Dr. Gil Befman, Leumi’s chief economist, anticipates that the index in the US will stand at 0.1%-0.15% in January. He believes that the rate of price increase is gradually slowing and moving towards the Fed’s stability goal. He also predicts that we will see inflation gradually decrease to a rate lower than 3% in core data terms over the course of the year.
According to Befman, the index close to January will not be low enough to push the Fed to lower interest rates. However, it could have a significant impact on the market’s expectations, especially if the index surprises very much downwards. If the index surprises positively, it could open the door to the possibility of a first interest rate reduction at the beginning of May.
The American economy grew by 3.3% in the last quarter of 2023, surprising early expectations of a slowdown in the American growth rate. The job market remains tight and shows low unemployment levels and continued job growth in several US states.
Befman notes that the strong state of the American economy allows for caution. The members of the central bank want to ensure that there is a ‘soft landing’ from the high price increases experienced in 2022 and early 2023.
Since the publication of the Fed’s forecasts for 2024, market expectations have shown doubts about the Fed’s plan and expected a more aggressive reduction plan. The Fed has acted to moderate these expectations and align the markets with the bank’s planning.
Rafi Gozlan, Chief Economist at IBI, also believes that the current index will give a direction reading regarding monetary easing in May. He noted that the macro picture is surprisingly positive and the current data show growth in the current quarter as well.
The assessment: In Israel the interest rate cuts will continue
In Israel, the economy is dealing with the economic shock caused by the war. In January, the Bank of Israel reduced the interest rate to 4.5%, for the first time since 2020. The Bank of Israel is uncertain about continuing the interest rate reduction plan. The national forecast for the consumer price index data to be published in Israel this coming Thursday is that the annual rate will be 2.6%.
The forecast for the year ahead is around 2%, according to the Bank of Israel target center. Befman estimates that there will be reductions of a quarter of a percent at the beginning of each quarter. He also added that if the Fed lowers interest rates in the US, Israel will feel comfortable doing the same.
Gozlan points out that the upcoming index can tell the rest of the story of the recent indices that showed weak demand. He emphasizes that activity is returning to a more normal state and the previous indices were affected by weaker demand.
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