Inflation surprised to the upside in March when it came out at 2.6% y/y but the markets ignored the data amid soothing comments from the FOMC. This time the market consensus is already at 3.6%. What if actual inflation is even higher? To what extend can the Fed keep ignoring it?
The narrative from the Fed is simple – inflation spike is transitory and is mainly a result of very low level from a year ago. Indeed a spike of inflation in March was driven mainly by fuel costs – 0.7pp in transport alone (so without this, inflation would be 1.9%) and this will get much worse today as fuels lowered inflation in April 2020 by 1.2pp!
Pick up of inflation in March was mainly a result of higher fuel prices while other categories will tell us more on the seriousness of the inflation pressure. Source: Macrobond, XTB Research
The question is, to what extend will other categories contribute? In March there were no clear signs of a broad inflation pressure. Used cars was the only category outside fuels that saw outsized contribution (which will be probably much higher today). This broad inflation needs to be seen before the Fed actually reacts in any way.
Market reaction is another thing. If the Fed was officially worried about inflation, higher reading would have obvious ramifications. But because the Fed maintains it’s transitory, inflation would need to be probably much above expectations (perhaps above 4%) to spook the markets.
US100 has actually stabilized after a sell-off. This is the market that can react the most directly to the CPI release. Source: XTB Trading Platform
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