Inflation Jitters Return

US CPI figures appear to confirm the markets fears that inflation is on the rise and, at a faster pace than was expected.

US inflation figures showed headline CPI remained constant in January at 2.1% year on year, ahead for forecasts of 1.9%. Meanwhile core CPI, which excludes more volatile items such as food and fuel, also remained constant at 1.8% year on year, rather than dipping to 1.7% as expected.

The other big piece of data from the US was retail sales, and just as much as CPI surprised to the upside, retail sales did so to the downside. Retail sales were -0.3% in January, down from an increase of 0.4% in December and missing expectations of 0.2%. These figures showed that consumers stopped shopping in January and consumers reining spending at time when inflation is moving higher.

Delving deeper into the inflation figures, the increase in prices was broadly across non-discretionary items for example, car insurance, medical insurance, transport costs, rents. The increase in price of these necessities, meant that the US consumer had less disposable income to spend on discretionary items, which could go some way to explaining the poor retail sales figures. If this is the case, and US consumers are reining in their spending on discretionary items, this could be a point of concern going forwards. Consumers reining in at a time of increasing inflation is not a good recipe.

Market reaction:

With the figures confirming the markets fears of higher inflation and potentially more aggressive monetary policy tightening from the Fed, bonds tanked sending yields back up to 2.87. The higher yields boosted the dollar, which had been under pressure throughout the morning.

The dollar index which had dropped to 89.16 has picked up to 89.78 as it looks to attack the psychological level of 90. Meanwhile USD/JPY is down 0.6% breaking through resistance at 107.3 as it brings 106.8 into target. Unsurprisingly the selloff in the US equity markets also resumed, the Dow futures and the S&P futures were trading down just shy of 1% within half an hour of the release, however we are starting to see signs of those losses being pared with both the Dow & S&P futures down some 0.75%.

The fact that the selloff didn’t push over 1% and that losses are being trimmed, suggests that the market could be slowly starting to get to grips with the new higher inflation environment reality.