US CPI Data - Still Running hot

"STARTING STRONG IS GOOD. FINISHING STRONG IS EPIC."

This is the first article I am writing this week post the higher-than-expected CPI inflation print from India and the US.

Data Release:

US CPI rose 0.5% in January on a seasonally adjusted basis following an upward revision in Dec data to 0.1 % from -0.10%. Headline CPI rose 6.4 % before seasonal adjustment against market consensus of a 6.20% reading. Core CPI rose 0.40% mom, services (excluding energy services) rose 0.50% mom, shelter rose 0.70% and transportation services rose 0.90% mom.

The food index increased 0.5 % mom. Interesting point to note - Egg price index rose 8.5% mom on account of Avian Flu, high cost of feed and transportation etc. In the US , a dozen eggs cost INR 400 / INR 33.33 per egg. Compare that to India where 1 egg costs Rs. 7. The energy index increased 2.0 % mom. The rent index and the owners' equivalent rent index each rose 0.7% mom while the index for lodging away from home increased 1.2% mom. This blog has earlier covered on the lagged effect of home price changes on CPI print. The current deceleration in home prices is likely to start reflecting in the second half of the year. Fed Chair Powell also mentioned the same is his press conference– “We expect inflation to continue moving up for a while but then to come down assuming that new leases continue to be lower.” Core services ex-energy and ex-housing rose 0.30% mom which is the area that the Fed is most concerned about.

The market has had to digest a strong NFP print followed by a strong CPI data which is decelerating but remains elevated and adds to concerns that the Fed would keep interest rates elevated through the year along the projected lines.

Post the release of the CPI data, markets repriced Fed funds rate. Market pricing of Fed Fund rates now overshoots the Fed’s guidance and the Dec 2023 pricing now roughly coincides with the Fed’s guided path.

Market is now pricing Peak terminal Fed Fund rate at 5.26% and Dec 2023 Fed Fund rate at 5.0650%.

Comments

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