US UoM Consumer Sentiment Index rises to 53.3 in December

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American consumer confidence edged higher in early December, as households grew more optimistic about current conditions and the broader economic outlook, according to preliminary data from the University of Michigan (UoM).

Consumer confidence improved in December, surpassing market forecasts.
One-year inflation expectation edged lower to 4.1%.

The closely watched Consumer Sentiment Index rose to 53.3 from 51 in November, surpassing economists’ expectations (52) and signalling an improvement in public confidence.

Furthermore, the Current Conditions index dropped a tad to 50.7 from 51.1, while the Consumer Expectations gauge advanced to 55 from 51, highlighting an upbeat scenario for the months ahead.

Inflation expectations, meanwhile, ticked lower. The one-year outlook eased to 4.1% from 4.5%, and the five-year forecast came in at 3.2% from 3.4%.

Market reaction

The US Dollar remains on the defensive, adding to the ongoing move lower and sending the US Dollar Index (DXY) to the area of multi-week lows in the sub-99.00 region.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.