Higher than expected US inflation data reinforced the case for a more hawkish Fed, leading to a selloff in stocks and risky assets, and firmly boosting the US Dollar.
United States CPI Rises by 0.1%
The United States’ CPI index rose by 0.1% month-on-month in August after being unchanged in July, according to the September 13 inflation data released by the Bureau of Labor Statistics. This puts US inflation at annualised rate of 8.3%, higher than the 8.1% which had been expected, but lower than last month’s rate of 8.5%. A monthly decline of 0.1% was anticipated by analysts.
The latest inflation figures are sure to embolden the Federal Reserve in continuing its aggressive hawkish path in tackling high inflation, with a fifth consecutive rate rise widely expected at the Fed’s next meeting on September 20th. Analysts now see a greater chance of a 1% rate hike then, although the consensus remains that it will be only 0.75%.
Markets responded to the news with money flowing out of stocks and other risky assets and into the US Dollar, as the 2-Year Treasury yield rose dramatically, trading above 3.8% at one point.
Over the past 12 months, the “all items” CPI index has risen by 8.3%, highlighting the effect of rising inflation.
There was more positive news over the gasoline index which fell by 10.6%, following on from the 7.7% decrease in July.
Overall, the energy index declined by 5% in August, falling by 0.4% more than it did in the previous month. However, the electricity index rose by 1.5%, its fourth consecutive increase by 1.3% or more, while natural gas climbed upwards by 3.5%, both figures revealing the continuing pressures that consumers are facing with energy costs.
Over the past year the energy index has grown rapidly by 23.8%, while the gasoline index increased by a huge 25.6% during the same period.
The food index did increase by 0.8% for August, but it was the smallest monthly increase since December last year.
Core inflation, excluding energy and food, spiraled upwards by 0.6% in August, a monthly rise of 0.2%. This is particularly concerning and suggests a persistence in inflationary pressures.
UK Inflation Drops
The UK’s annual inflation rate, conversely, has eased by a slender margin in August down to 9.9% from the 10.1% in July, but UK consumers are still facing prices accelerating at their fastest pace in almost 40 years.
A fall in the price in motor fuel was the principal reason why annualised inflation has come down, the Office of National Statistics (ONS) figures revealed
Overall, the annual inflation rate for transport was 12.4% in August, a decline from 15.1% in July.
Food and non-alcoholic beverage prices are soaring at their most rapid rate for 27 years, rising by 13.1% over the past 12 months, an increase of 0.4% from ONS’s July data.
The fall in motor fuel prices was also further offset by clothing prices, which surged upwards to 7.6% in the year to August and grew by 1% compared to the year to July.
The universal cap on energy prices of £2,500 per year introduced by new UK Prime Minister Liz Truss will have a positive effect on reducing inflation, but it does not come into effect until October.
Since the announcement, the British Pound has at last had something to cheer about in the GBP/USD currency pair only a week after falling to a 37 year low against the greenback, as it increased by 0.25% against the US Dollar with £1 buying $1.15.
There was a similar pattern against the Euro, as Sterling also gained ground by 0.14%.
Next week on 22nd September the Bank of England will decide if they will raise interest rates for the seventh consecutive month, after deciding last month that there would be a 0.50% hike in rates up to 1.75%.
Nasdaq 100 Index Hits 1-Year Low
The tech-based Nasdaq 100 Index has fallen by just over 5% to its lowest level in a year, while the S&P 500 Index has also suffered strong losses. The US inflation data has been bad news for stock markets.
The US Dollar gained strongly following the US data release but has given up a little ground today as the EUR/USD currency pair regained parity and the Bank of Japan begins to signal an intent to intervene in the market to prop up the extremely weak Japanese Yen, after the USD/JPY currency pair came close to reaching the significant ¥145 handle.