The market reaction was a touch fatalistic – a 41-year high for headline consumer price growth in the US of 8.5% and shares fell after an early rise, bonds were a touch firmer and the currency went nowhere fast.
Heading into Easter, the modest reaction from investors is a sign that they expect the US Federal Reserve to give us a half a per cent rate rise next month and probably for a couple of meetings after that.
There now seems to be acceptance the US central bank will move quickly and decisively to push rates higher as quickly as possible.
But it has to be remembered that the Fed and other central banks have no control over the main driver for inflation – high oil prices which are being in turn driven by the geopolitical instability in Ukraine, Europe and now China with its biggest Covid infection so far.
That would see US official rates around 2% or perhaps a bit more by year’s end, just as inflation is easing and growth slowing. No wonder economists are also calling the start of a stagflationary period later this year.
The rise to an annual rate of 8.5% from 7.9% was in fact widely expected as petrol prices soared off the back of the sharp rise in global oil and gas prices in the wake of President Putin’s invasion of Ukraine on February 24.
From February to March, headline inflation rose 1.2%, the biggest month-to-month jump since 2005. Higher petrol prices drove more than half that rise.
Petrol prices surged 48% in the past 12 months; used car prices are up 35%, (though they actually fell in February and March). Bedroom furniture is up 14.7%, men’s suits and coats 14.5%. Grocery prices have jumped 10%, including 18% increases for both bacon and oranges, key staples of the American breakfast.
US airline fares have soared an average of nearly 24% in the past 12 months. The average cost of a hotel room is up 29%, so if you are travelling it now costs a lot more to go, regardless if it is by car or air. Airlines though are being forced to pay more for jet fuel.
There was a small a bright spot in the report – core inflation, which excludes volatile food and energy prices, rose just 0.3% from February to March, the smallest monthly rise since September. Over the past year, though, core prices are up 6.5%, the most since 1982 and just ahead of the 6.4% rate in February and the tiniest of hints that perhaps the surge in costs might be peaking.
Of course, core inflation readings do not matter very much to consumers or many businesses, just to the Fed but the weaker report this time won’t alter the 0.50% rate rise coming in early May from the US central bank.
US Treasury bond yields pulled back on Tuesday following the inflation report. The 10-year yield slid to 2.72% from 2.77% late Monday and the bounced back to 2.77%bin early Asian trading. It had been as high as 2.83% before the inflation report’s release. The 10-year bond yield nevertheless sits well above the 1.51% where it began 2022.
The US dollar was mixed but the Aussie was around 74.40 in early local dealings Wednesday morning
Wall Street was in fact a bit two-faced about the inflation figure and its meaning.
The S&P 500 lost 0.34% to 4,397.45, and the Nasdaq fell 0.30% to 13,371.57, as both posted losses for a third trading day. The Dow dropped 87.72 points or 0.26%, to 34,220.36.
The late fade belied the strong start to the session, with the Dow rallying as much as 361.89 points, or about 1.1%. The S&P 500 and Nasdaq were up as much as 1.3% and 2%, respectively, at their highs.
All this left the ASX 200 futures a touch weaker ahead of the start to trading later this morning.
