US CPI beginning to retreat
The Fed has been suggesting that the spike in US inflation would be transitory and begin to normalize in the latter months of 2021. Whilst it is still too early to determine how quickly inflation will unwind, US inflation seems to have peaked, with the normalization process underway. How quickly the process takes, is still too early to say.
Headline US CPI fell from 5.4% in July to 5.3% in August. This also came with the lowest month on month increase since the +0.3% increase in January 2021. The year on year reading of +5.3% was in line with the 5.3% forecast. However, the decline in the core US CPI has been the attention grabber for traders. Core CPI fell back to +4.0% in August (from +4.3% in July) and was less than the +4.2% YoY reading that consensus had been forecasting.
From the table below it is clear to see a few trends in what is driving the data:
Energy prices remain a key factor in the high inflation for the headline CPI
Used cars and trucks are now a key drag lower for inflation after being eye- wateringly high over the summer.
Transportation services are also increasingly pulling inflation lower.
What does this mean?
For the Federal Reserve, this will simply reinforce what they have been saying about inflation being “transitory”. The FOMC is far more interested in how the labor market is developing and the recent weak Nonfarm Payrolls report will have molded the September FOMC meeting far more than this inflation data. If anything it reinforces the now fairly solid expectations that tapering will begin in December and no sooner.
Initial Market Reaction
Markets are reacting in a fairly understandable way. Treasury yields falling, mildly USD negative, commodities (priced in dollars) higher and equities risk positive. However, seeing as this inflation data changes very little, these moves are likely to be relatively short-lived.
US 10 year Treasury yield -2.5 basis points
EUR/USD +30 pips
S&P 500 futures +20 ticks