Inflation Capped in USA, Overshoots in UK

Closely watched inflation data releases meet expectations in the USA, while in the UK the data came in higher than had been expected.

US March 2022 CPI

Tuesday 12th April 2022 saw the release of US CPI (inflation) data, with the release being very closely watched by the market, as the major macroeconomic story of recent months has been accelerating global inflation which was initially described by the Federal Reserve as “transient”. The past few months have seen data continue to exceed expectations with each release, pushing the Fed into a tighter monetary policy, and raising the chance that one of its forthcoming rate hikes will be as high as 0.50% instead of the more typical 0.25%.

It was expected that the March 2022 CPI data would show an increase in the headline annual rate from 7.9% to 8.5%, and this is what happened, with the month-on-month increase running at 1.2%. Interestingly, the core CPI, which is arguably a more accurate meter of underlying inflationary pressures, undershot expectations, coming in with a month-on-month increase of only 0.3% compared to the expected 0.5%. More than half of the month’s increase in inflation was composed of increased energy costs. This, plus the fact that the data undershot expectations overall, has given some hope to analysts that US inflation may be peaking now at 8.5%, a rate which has not been exceeded since 1981.

UK March 2022 CPI

Wednesday 13th April 2022 saw the release of UK CPI (inflation) data. Like most other major central banks, the Bank of England is in middle of a process of increasing its historically low interest rate with a series of rate hikes.

Recent months have seen inflation data continually overshoot expectations, and unlike in the US data, this continued, with the March 2022 headline inflation rate coming in at an annualized 7.0%, exceeding the expected rate of 6.7%. Core CPI also overshot, with an annualized rate of 5.7% well exceeded the analyst consensus of 5.3%.

Inflation this high has not been seen in the UK since 1992, with food and drink up by almost 6% and energies up by more than 25%.

What Does This Mean for Traders?

Neither of these data releases produced unusual or even strong reaction in the Forex market. The US Dollar remains the strongest major currency and paradoxically, higher inflation has been stoking the Fed’s more hawkish policy on interest rates, which has given a tailwind backing the greenback’s recent rise.

One possible takeaway is optimism concerning US inflation. It may be that the annualized rate may be peaking, and with the price of crude oil way off its recent high, if energy costs are prevented from rising any further, the US may now start to see inflation topping out. There had been fears that a headline rate above 10% could begin to cause seriously high embedded inflationary expectations which could lead to a real economic unravelling, and it may be that this danger has passed. The war in Ukraine has clearly contributed to inflation, but maybe not as strongly as had been feared, although many commodities, especially foodstuffs, remain high and rising.

I do not see these data releases as having any major impact now on the Forex market, but we remain in a high inflation environment historically, which can only be bullish for the prices of commodities and anything representing real property.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.