Morning Brief – Inflation today

Charles Porter
Tue 13 Feb 2024

Inflation today

The most watched item on today’s agenda will undoubtedly be US CPI inflation. The statistic due for release this afternoon observes consumer price inflation for the month of January. It is a critical figure for two reasons. Firstly, the Fed has pushed back against market expectations for a rate cut as soon as their next meeting suggesting more time is necessary to observe inflation to ensure it is truly under control. Despite this we are still close to the start of an inevitable easing cycle, making any forthcoming data pivotal. Secondly, the figure due to be released may have an important number at the start of it.

Moving into today’s CPI release, the consensus forecasts a 2.9% reading. This is markedly down from the previous 3.4% recorded in December and published in January. Core CPI inflation is expected to remain higher than its nominal headline counterpart due to comparatively disinflationary trends within non-core basket items. A reading in line or below the forecast of 2.9% could prompt traders to price in additional rate cuts this year and from an earlier starting point. What is likely more of a risk given the post-Fed meeting flavour in the market, is that a reading of 3% or higher would prompt any further surplus rate cuts in excess of the Fed’s dot plot that the market currently has priced in to be eliminated. This would result in net Dollar buying. 

Whilst it is perhaps too early to move the market significantly, there are some warnings surfacing regarding how the forthcoming monetary policy easing cycle could resemble that seen in 1998. Three successive rate cuts to stave off impending economic risks spurred fresh inflationary pressures that resulted in prompt hiking shortly after. As analysts published yesterday, the current pricing of the Fed’s forthcoming easing cycle may be wrong, but not for the reasons that have typically been thought. Fresh analysis suggests that the implied path of hikes could be exaggerated and that the easing cycle to ensue later this year may be shorter in size and duration than the market currently expects. Additionally, the risk of subsequent rate hikes following this easing cycle is being ignored. Such a paradigm if realised would change cross-asset pricing significantly later this year.

Discussion and Analysis by Charles Porter

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