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US Inflation Rises to 7.5%

US inflation rises faster than expected again this month to reach its highest level in 40 years, sending the US dollar higher.

February 2022 US CPI Data Release

Today saw the release of monthly US CPI (inflation) data showing the extent to which the price of a representative basked of goods and services is rising. The data showed that month on month, US inflation rose by 0.6%, slightly higher than the 0.4% which was the consensus forecast, and higher than last month’s rate of increase of 0.5%. Core CPI, which measures the increase of a more narrowly defined basket of goods and services, rose by 0.6%, also slightly higher than the 0.5% which was the consensus forecast, although its rate of increase was the same last month.

Inflation rose by more than expected. The monthly data shows yet another increase in the annualized rate of inflation to 7.5%, the highest rate recorded since 1982, and well above last month’s annualized rate of 7.0%. Markets had been expecting an annualized inflation rate of 7.3%.

Rising prices for food, energy, and home rental were major contributors to the rise in the CPI.

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Market Reaction to US CPI Data

The release was made near the start of Thursday’s New York session, so at the time of writing, markets have only had about one hour to react. However, it is clear that compared to the previous month’s CPI data release, reaction was stronger.

The major US stock market index, the S&P 500, fell by 1.29% over the hour following the release, and the US Dollar Index (USDX) rose by 0.25%. The US dollar rose especially strongly against the Japanese yen, with the USD/JPY currency pair threatening its 4-year high at JPY116.35. If the price closes in New York tonight above JPY116.35, we will be likely to see higher prices in this currency pair over the coming days.

The market is already expecting a first US rate hike by the Federal Reserve next month, with some feeling that this or the second hike could be as high as 0.5%, twice the size of the typically expected increments. This increase in the pace of inflation will make these expectations stronger and can be expected to be bearish for stock markets and bullish for the US dollar and commodities in general.

What Does This Mean for Traders?

The long-term trend in the US Dollar and the boost it is getting from a higher expectation of forthcoming rate hikes suggest going with the flow will mean trading in favour of the US dollar and commodities, especially against the weak Japanese yen and US stock market. The CPI data seems to be affecting the US dollar and the US stock market more than anything else – it is not pushing global markets into strongly risk-off sentiment.

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