US inflation is running hot, already reaching levels expected only in the summer. Did the commodity boom give investors a warning?
The much-awaited US inflation data for the month of April was released yesterday. It exceeded even the wildest expectations, coming in much higher than the forecast.
The headline CPI was expected higher by 0.2% in April, after an increase of 0.6% in the previous month. Instead, the actual for the month of April showed an increase by 0.8% – four times than the forecast.
More surprisingly was the Core CPI data – the one that excludes food and energy prices. Its growth rate tripled in April when compared to March and to expectations, coming in at 0.9% against an expected 0.3%.
No-one should be surprised by the rise in prices. Commodity prices have shown investors for a while now that prices are running hot. At the current pace, the risk is that they will exceed the 1971 move higher, the strongest on record, heralding a period characterised by rising inflation rates.
Annualised Core Inflation Already Above 3%
On an annualised basis, the Core inflation data is at 3%, already exceeding the Fed’s previous target of 2%. Moreover, the headline inflation rate jumped above 4%, also far away from the Fed’s target.
The equity markets declined on the release, as they indicated they would do since the start of the trading week. But not the dollar.
Higher inflation may translate into a weaker currency, but the US dollar is the world’s reserve. Rising inflation in America suggests similar conditions in the rest of the world. Hence, instead of a weaker currency, the dollar benefited from the risk-off move.
Over the past decade, the Fed has struggled to keep inflation at 2%. It has not succeeded, but it did raise interest rates above 2%. The answer comes from the Fed’s dual mandate – job creation and price stability. Out of the two, job creation is more relevant for the Fed, at least if we judge it by its past actions.
The Fed speakers this week insisted that inflation will be transitory and are treating it as such. Their comments confirm their focus on the jobs-creation part of the mandate, so a return to normalised policies should happen only with a significant improvement in the unemployment rate.