U.S. Inflation: Headline CPI at 7%, Core at 5.5% v/s 5.4% Expected

[MongiIG]

U.S. INFLATION TALKING POINTS:

• This morning brought the release of CPI for the month of December.
• While starting last year in a rather tame manner, inflation climbed throughout 2021 to the point that it became a large issue for the FOMC.
• This morning’s inflation print was expected to come in at 7% with core inflation expected at 5.4%.
• The data released with headline inflation printing right at the 7% target and core posing a slight beat at 5.5% v/s 5.4% expected.
• The immediate result was US Dollar weakness as the currency broke-below a big spot of support.

This morning brought the release of U.S. CPI for the month of December and this print came out amidst an intense focus on inflation.

After coming into 2021 at 1.4%, inflation continued to climb throughout 2021 to the point that it became problematic for the Federal Reserve’s loose money policy. As we open the door into 2022, inflation remains elevated and the Fed is now at the point in which they appear ready to begin tightening policy. The big question now is when does it start and by how much?

This morning’s CPI print came in at an annualized read of 7%, right in-line with expectations; and core CPI printed at 5.5% v/s a 5.4% expectation.

US DOLLAR BREACHES SUPPORT

Despite the massive inflation print, the US Dollar has fallen below support and now trades at fresh monthly lows with fresh two-month-lows now very nearby. This is likely because markets had become accustomed to strong beats on the headline figure and it seemed as though many were braced for a repeat again this morning. But, with headline inflation printing ‘only’ at 7%, it seems that markets may catch a temporary reprieve, somewhat driven by the fact that at least some of the inflation that’s being seen is partially transitory.

US DOLLAR DAILY PRICE CHART

Chart prepared by James Stanley; USD, DXY on Tradingview

STOCKS JUMP

Another knock-on effect of inflation printing in-line with expectations has been a reprieve move in stocks. As markets began to gear up for more and more possible rate hikes, equities were on their back foot with a degree of vulnerability.

But, after Powell’s comments yesterday which came out fairly dovish, at least in my opinion, combined with this morning’s CPI release, equity markets have new rationale for backing the bid.

S&P 500 futures are jumping ahead of the open and there’s the appearance of an inverse head and shoulders pattern here, which can keep the door open for bullish breakout scenarios.

S&P 500 TWO-HOUR PRICE CHART

Chart prepared by James Stanley; S&P 500 on Tradingview

 

Written by James Stanley, Senior Strategist for DailyFX.com. 12th Jan 2022.

[MongiIG]

U.S. consumer prices increase strongly in December

Economic IndicatorsJan 12, 2022 

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© Reuters. FILE PHOTO: Shoppers browse in a Home Depot building supplies store while wearing masks to help slow the spread of coronavirus disease (COVID-19) in north St. Louis, Missouri, U.S. April 4, 2020. Picture taken April 4, 2020. REUTERS/Lawrence Bryant/File

WASHINGTON (Reuters) - U.S. consumer prices rose solidly in December, with the annual increase in inflation the largest in nearly four decades, which could bolster expectations that the Federal Reserve will start raising interest rates as early as March.

The consumer price index increased 0.5% last month after advancing 0.8% in November, the Labor Department said on Wednesday. In the 12 months through December, the CPI surged 7.0%. That was the biggest year-on-year increase since June 1982 and followed a 6.8% rise in November.

Economists polled by Reuters had forecast the CPI gaining 0.4% and shooting up 7.0% on a year-on-year basis.

The economy is experiencing high inflation as the COVID-19 pandemic snarls supply chains. The high cost of living is weighing on President Joe Biden's approval rating.

Inflation is well above the Fed's 2% target and is also being lifted by budding wage pressures. The government reported last Friday that the unemployment rate dropped to a 22-month low of 3.9% in December, suggesting that the labor market is at or near maximum employment.

Fed Chair Jerome Powell on Tuesday said the U.S. central bank stood ready to do what was necessary to keep high inflation from becoming "entrenched," in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as head of the bank.

"The laundry list of reasons for the Fed to begin removing monetary policy accommodation is growing," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Inflation would need to decelerate rapidly to take some of the pressure off the Fed and this is unlikely to occur."

Money markets currently price about 85% odds of an interest rate hike by March, and a total of at least three quarter-point hikes by year-end. [FEDWATCH]

Economists believe the year-on-year CPI rate probably peaked in December or will likely do so by March. There are signs that supply bottlenecks are starting to ease, with an Institute for Supply Management survey last week showing manufacturers reporting improved supplier deliveries in December.

But soaring COVID-19 cases, driven by the Omicron variant, could slow progress towards normalization of supply chains.

Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November. In the

12 months through December, the so-called core CPI accelerated 5.5%. That was the largest year-on-year gain since February 1991 and followed a 4.9% advance in November.

 

Core inflation is being driven by rising prices for services such as rentals, as well scarce goods like motor vehicles. The year-on-year core CPI rate is seen peaking in February.

"The first quarter should see inflation peaking, with lower energy prices and a decline in food and auto inflation allowing for a slower increase in prices for the rest of the year," said David Kelly, chief global strategist at JPMorgan (NYSE:JPM) Funds in New York.

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