The rally in markets over the last month has largely been driven by the view of a “soft landing” in the US, that is, that core inflation can quickly return to 2% without the economy having to go through a recession. Slower growth and the resolution of all the pandemic-related disruptions is supposed to be sufficient. Hence the US Federal Reserve (Fed) can begin cutting policy rates as soon as March.
The latest inflation data from the US does not necessarily support such an optimistic view. Core inflation declined from 4.0% in November to just 3.9% in December, a small deceleration. At this rate it would take almost two years before core inflation returned to the bank’s target. A recession may yet be avoided, but the Fed might not be cutting policy rates as soon as hoped.
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