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US Inflation Rises, Markets Unimpressed


US inflation rises again this month to reach its highest level since 1982, but financial markets barely reacted.

December 2021 US CPI Data Release 

Last Friday 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, inflation rose by 0.8%, slightly higher than the 0.7% which was the consensus forecast. Core CPI, which measures the increase of a more narrowly defined basket of goods and services, rose by only 0.5%, exactly in the line with expectations.

It is therefore clear that inflation rose by slightly more than expected. The monthly data shows yet another increase in the annualized rate of inflation to 6.8%, the highest rate recorded since 1982. However, it is also worth noting that the previous month saw a stronger monthly increase of 0.9%, which possibly points towards the pace of inflationary increase slowing down, although this is very debatable.

Market Reaction to US CPI Data

The release was made near the start of Friday’s New York session, so at the time of writing, markets only about seven hours – the length of one market session – to react. However, it was clear that compared to the previous month’s CPI data release, reaction was muted, although the inflationary overshoot beyond forecasts was more dramatic last month.

In a nutshell, markets hardly reacted, or at least the price movements following the release were proportionate to the price action already happening in all major assets such as the S&P 500 Index or the US Dollar Index. The S&P 500 Index rose by less than 0.5%, while the US Dollar Index (USDX) declined by barely 0.17%.

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Probably the most interesting fact is that inflationary pressure produced a drop in the US dollar and not an increase. This is probably due to two reasons: firstly, the data was not strong enough to make markets think it made an earlier rate hike by the Federal Reserve more likely; secondly, the overshoot was very small (only 0.1% in the month-on-month data) and the Federal Reserve reports in just a few days anyway.

What Does This Mean for Traders?

Traders should probably put this data to one side for now and expect it to not really influence prices as the week opens for trading. The coming week in the Forex market will see several high-impact data releases concerning the US dollar and other major currencies including three central bank policy releases concerning major currencies. These factors, as well as any more conclusive data on the morbidity caused by the omicron coronavirus variant, are most likely to move the markets over the coming days. In particular it will be wise to keep a close eye on the FOMC Statement and Economic Projections which will be released this coming Wednesday 15th December.



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