The Consumer Price Index (CPI) report for June showed that inflation reached its lowest level in more than two years, which is excellent news for the economy as a whole as well as the stock market.
About CPI
CPI, or Consumer Price Index, is an essential economic indicator used to measure inflation and changes in the average prices of goods and services over time. It serves as a crucial tool for policymakers, economists, and individuals in understanding the purchasing power and cost of living in a given economy. The CPI is calculated by tracking the price changes of a basket of commonly purchased items, including food, housing, transportation, and healthcare, among others.
Lower CPI Growth Than Expected
The consumer price index only increased by 0.2% in June, which was lower than the growth that economists had anticipated of 0.3%, and it only increased by 3% year-over-year, which was its lowest level since March 2021 and was lower than the advance that analysts had anticipated of 3.1%.
Investors React Well to Better-Than-Expected Inflation
On Wednesday, investors responded favorably to a better-than-expected reading on inflation, as evidenced by a one-percentage-point increase in the Dow Jones Industrial Average, the Nasdaq 100, and the S&P 500.
Tom Lee’s Opinion
Tom Lee of Fundstrat, who anticipated at the beginning of this week that the S&P 500 was primed for a 100-point rally that would be ignited by a better-than-expected inflation number, was not surprised by the powerful move higher than the market experienced today.
Now, Lee is claiming that a rally in the S&P 500 of 100 points this week might be on the low end, with a potential rally driving a gain in the index of more than 200 points. Specifically, he is arguing that this week’s rally could be at the low end of the range. The S&P 500 would reach new 52-week highs with a gain of this magnitude.
Six out of the previous eight updates on the consumer price index (CPI) were met with a positive reaction from the market. The two ‘surprises’ caused rallies that ranged from 4% to 5%, which added +180 to 225 points. According to a note that Lee sent out to clients on Wednesday, “Our 100-point rally tactical call might be on the low side of the range.”
The reason for such a favorable response to lower inflation readings is that they bolster the concept of a soft landing scenario in the economy. This is a scenario in which a recession is ultimately avoided in spite of the strong monetary tightening that has been carried out by the Federal Reserve over the course of the past year.
The Fed Might Hike Rates 2 Mores Times This Year
With markets presently pricing in only one more increase in interest rates for the year, the low inflation data also provides the Federal Reserve with greater leeway in its decisions about interest rate hikes and decreases. Prior to the release of the CPI report, indications from the futures market pointed to the possibility of two additional rate increases from the Fed before the end of the year.
And low inflation is excellent for consumers because wage growth is finally starting to surpass the rate of growing prices. This results in real income growth for consumers and gives them more spending power, which is the majority of what drives the economy in the United States. Additionally, low inflation is great for the government because it reduces the likelihood of a runaway inflationary spiral.
Lee anticipates that June’s low inflation reading will persist throughout the summer, which, once again, might bolster the confidence of bullish investors who are expecting that the economy will continue to show resilience.
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