The headline inflation rose to 7% year-on-year, the highest level since 1982, and the core figure hit 5.5%, the biggest growth since February 1991. Both data were well above what is considered a target level for central banks – around 2%. Note that interest rates were above 8.5% in 1982, while at present, the Federal Reserve maintains its ultra-expansionary monetary policy, keeping reference rates at 0%.
Indeed, the Fed has already pointed towards more restrictive policy changes, including ending its bond-buying program and increasing interest rates this year.
If inflation continues to increase or remains at current levels, real interest rates will likely stay in the negative territory, providing an extraordinary stimulus to the economy. However, it could still not be enough to prevent an inflationary spiral that can carry over to wages. For this reason, the market had expected greater determination in Powell's statements, especially concerning the reduction of the Fed's balance sheet. However, there is still the possibility they will reconsider it in the following meetings before the first hike expected to occur in March.
Time to look ahead to the Producer Price Index
The PPI report scheduled to come out today could also exceed previous levels. However, after the market's reaction to the CPI figure, today's data should not have a major impact.
The financial markets reacted differently to inflation news.
Despite the historically high CPI data that should lead the market to anticipate more aggressive rate hikes, the 10-year bond yields continued to fall, down to 1.73%. The stock markets registered modest gains, seemingly ignoring the high inflation threat to the economy. The US dollar weakened significantly against its competitors.
EUR/USD decisively broke the 1.1380 resistance that has not been overcome since mid-November and was heading towards the next reference zone located at 1.1512, through which the 100-day moving average passes.
GOLD remained at the high levels recorded in recent days without exceeding the important 1831 price hotspot zone. Precious metal traders seem to be among the few still unsure about Fed's take on inflation.
Sources: Bloomberg Reuters.