USD CPI Data Shocks Markets

Tom Stewarton 13/01/2023|
2 min read

The latest United States Consumer Price Index (CPI) report has confirmed that prices are cooling. However, it remains to be seen whether this data will influence the Federal Reserve’s thinking. It is important to remember that while short-term reactions to market fluctuations should not be ignored, the overall impact on monetary policy decisions is what truly matters.

Today’s data shows that the inline headline and Core reading were at their lowest since October and December 2021, respectively. Despite this, the market was leaning heavily towards a downside surprise. As a result, we have seen stocks and bonds drop in the immediate aftermath.

When considering the broader picture, the question arises as to whether this slowdown in inflation will have an impact on the Federal Reserve’s decisions. Notably, shelter costs, which constitute the largest services component and account for around a third of the overall CPI index, increased 0.8% last month, marking an acceleration from November. Furthermore, when energy, rent, and owners’ equivalent rent are excluded, services prices increased by 0.3%, as calculated by Bloomberg.

It should be remembered that Federal Reserve Chairman Jerome Powell and his colleagues have emphasized the importance of considering such metrics when assessing the nation’s inflation trajectory. In summary, the slowdown continues. While inflation may have peaked, this does not necessarily mean that the Federal Reserve will deviate from its current course of action. The market is still pricing in a Federal Reserve interest rate hike in February, with a 93% probability of a 25 basis point increase, compared to 73% prior to the release of today’s data.

XAUUSD and the market volatility post CPI release.