The big upside surprise to US inflation last week affected US currency, fixed income, and equity valuations. The market disturbance created by rising price pressures in the real economy was widespread and significant. In addition to the displacement in financial markets already, there is a high probability of further inflation-linked volatility in the week ahead. When US CPI was last read you will recall the month-on-month variation in the price level was observed at 0.9%. When compared to the already strong 0.6% forecasted, you may not think this constitutes that big of a miss versus expectations.
It is the nature of the number, presented as a percentage over a misleadingly short time span, that underplays the significance of CPI variations. That same statistic can be interpreted in another way by highlighting that one, if not the, most market sensitive statistic came in 50% stronger than forecast… In monetary terms, that price level change within just one good, gasoline, sold within America, changes the total value of gasoline sold in America in one year by a staggering $1.5bn. Tiny changes in these statistics can have huge ramifications in the real economy.
It is not just the significance of this statistic that means that volatility is to be expected as the market seeks clues as to the response of economic authorities in the USA. When the CPI data was observed it changed the market’s expectations about inflation and the price level globally in this post-pandemic reflation era, meaning that the reaction was not just isolated to the US. Whilst this may be a pragmatic response as the market adjusts its expectations globally surrounding inflation, with only one solid data point in the US to base these changing global expectations upon there is clearly a huge potential for upside and downside surprises as national statistics populate the inflation backdrop.
On Wednesday this week inflation will be read in the UK, the Eurozone and Canada. All of these economies have had a big repricing of inflation (and interest) rate forecasts following the release of US CPI data last week. Of particular note, the inflation rate year-on-year for October is expected to be observed in the UK at 3.9%. Any upside surprise to this data could put pressure on the Bank of England to respond faster and cause higher rates to be priced in. However, with so much salient data forecast in one day, markets will be bracing for turbulence.
Discussion and Analysis by Charles Porter
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