US inflation soars to 40-year highs
US CPI inflation has increased to levels not seen since January 1982. Rising by +0.6% for the month in January, the US headline CPI has increased to 7.5%. This was higher than the forecast of a consensus of analysts which had been looking for (at 7.3%).
This also came with US core CPI increasing to 6.0% in January (from 5.5% in December). Once more this was higher than the consensus, which was looking for 5.9%.
As can be seen in the breakdown of the components of inflation in the US (provided by the Bureau of Labor Statistics), the cost of fuel and energy remains a significant driver behind the rise in headline inflation.
What does this mean?
This higher than expected inflation data heaps yet more pressure on the Federal Reserve to tighten policy. Cue more accusations of being behind the curve on inflation (remember, as of today the Fed is still buying assets as part of its emergency QE program, even if it is ending this month).
According to a chart on ZeroHedge, the number of rate hikes expected by markets this year is close to six. That would be almost one hike at EVERY meeting. A normal tightening cycle would be looking at possible a rate hike every other meeting (four per year).
Initial Market Reaction
The usual market reaction seems to be coming with this data surprise. Yields have shot higher, USD is stronger and risk appetite is negative:
- US 10 year Treasury yield has jumped by +5 basis points
- EUR/USD fell by around -50 pips in about 20 minutes (although is starting to reclaim some of these losses)
- Gold has been volatile (remember higher inflation and USD strength are conflicting forces on gold) and is all but flat.
- S&P 500 futures have dropped by -40 ticks