Higher than hoped for US inflation figures spooked the market in early trading, with indices around the world dropping sharply on the news.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% in January on a seasonally adjusted basis, according to the US Bureau of Labor Statistics. Over the Past 12 months, the all items index rose 2.1% before seasonal adjustment – the same as for December.
The figures increase the likelihood of further rates rises from Federal Reserve, which got a new boss in the shape of Jerome Powell earlier this month.
Jacob Deppe, Head of Trading at online trading platform, Infinox said: “Bond yields, Dow Futures and the Dollar have reacted immediately and predictably to the data. The Dollar moved up more than half a percent versus the Euro, while 200 points were wiped of Dow Futures and 10-year US Treasury also spiked to 2.87%.
“Wall Street won’t take this inflation data well and it’s likely to be a volatile day of trading. US markets fear higher inflation will embolden an increasingly hawkish US Federal Reserve.
Widespread price increase
The Bureau’s figures reported increases in prices for gasoline, shelter, apparel, medical care, and food, suggesting the heating up economy was across the board and not isolated. The energy index rose 3.0% in January, with the gas index more than offsetting declines in other energy components.
The food index rose 0.2% with the indexes for food at home and food away from home both rising.
The index for all items less food and energy increased 0.3% with rises in motor vehicle insurance, personal care, and used cars and trucks. The indexes for airline fares and new vehicles were among those that declined.
The all items index rose 2.1% for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8% over the past year, while the energy index increased 5.5% and the food index advanced 1.7%.
Deppe added: “Monetary policy is still likely to depend on first quarter US GDP data but if it proves to be as strong as some suggest, the Fed well take a significantly more hawkish path back to normal interest rates than expected, especially if inflation continues to creep up.
“The fear is the Fed hikes too far, too fast. US monetary policy will have to walk a tightrope in order not to kill off growth, while steering a path towards normal economic conditions. Mr Powell has an unenviable task ahead of him.”