US consumer confidence rose in early December, as households became more optimistic about current conditions and the broader economic outlook, according to preliminary data from the University of Michigan (UoM).
The closely watched Consumer Confidence Index rose to 53.3 from 51 in November, beating economists’ expectations (52) and indicating improved public confidence.
Furthermore, the current conditions index fell slightly to 50.7 from 51.1, while the consumer expectations gauge advanced to 55 from 51, highlighting an optimistic scenario for the coming months.
At the same time, inflation expectations fell. The one-year forecast fell to 4.1% from 4.5%, and the five-year forecast came to 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) into multi-week lows in the sub-99.00 region.
Frequently asked questions about inflation
Inflation measures the rise in the prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and is the level targeted by central banks, which are tasked with keeping inflation at a manageable level, usually around 2%.
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 monthly (MoM) and yearly (YoY) basis. The core CPI is the number targeted by central banks because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it typically causes interest rates to rise and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country causes the value of its currency to rise and vice versa for lower inflation. This is because the central bank will typically raise interest rates to combat rising inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Previously, gold was the asset investors turned to during times of high inflation because it maintained its value, and while investors will often continue to buy gold for its safe holdings 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 raise interest rates to combat it. High interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. On the flip side, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
