Title: US Core Inflation Surpasses Forecasts, EUR/USD Strengthens Post-Release
Author Credit: Adapted from an article by XTB.com Market Analysis Team
On March 12, 2024, the U.S. Bureau of Labor Statistics released inflation data for February that surprised markets. Core inflation, which excludes volatile food and energy prices, rose faster than economists had anticipated, signaling persistent underlying price pressures. This report had immediate effects across the foreign exchange (forex) and financial markets. Notably, the EUR/USD currency pair climbed higher following the data release, even though strong inflation typically boosts the U.S. dollar by increasing expectations of tighter monetary policy.
This comprehensive article breaks down the inflation data, explores market reactions, and assesses implications for monetary policy and key forex pairs.
Overview of the Inflation Report
The February Consumer Price Index (CPI) report showed both headline and core inflation numbers:
– Headline CPI year-over-year (YoY): +3.2%, higher than the forecast of +3.1%
– Headline CPI month-over-month (MoM): +0.4%, in line with expectations
– Core CPI YoY: +3.8%, above the forecast of +3.7%
– Core CPI MoM: +0.4%, above the forecast of +0.3%
The headline CPI increase was largely expected, but the surprise lay in core inflation, which measures prices stripped of energy and food categories. Core CPI is closely monitored by the Federal Reserve as a better indicator of medium-term inflation trends.
Notable Drivers Behind the Core CPI Increase
Specific categories contributed significantly to the higher-than-expected core inflation figure:
– Shelter costs led the inflation increases, accounting for over 60% of the total rise in the index
– Rent and owners’ equivalent rent (OER), key components of shelter, remained elevated on a monthly basis
– Core services excluding shelter saw more modest increases, implying that housing inflation pressure remains dominant
– Used vehicle prices fell, but not enough to offset increases elsewhere in the index
– Apparel and medical services posted slight gains on the month
Key Observations from the Data
– Shelter inflation continues to have a substantial impact on the CPI readings. Despite previous forecasts suggesting a slowdown, housing-related costs keep inflation elevated.
– Month-over-month core CPI at +0.4% is considered high and not consistent with a smooth return to the Federal Reserve’s 2% inflation goal.
– Sticky inflation in core components, particularly services, suggests that pricing power remains strong in some segments despite prior interest rate hikes.
– While goods inflation shows signs of disinflation or outright price declines, services are proving more resilient due to labor market strength.
Market Reactions
The release of hotter-than-expected core inflation data sparked immediate and sometimes counterintuitive moves in financial markets:
U.S. Dollar Reaction:
– Initially, the U.S. dollar strengthened slightly after the report due to expectations that the Federal Reserve might delay rate cuts.
– However, that strength faded quickly as the market began to price in the notion that a sustained high inflation environment could slow economic growth down the line.
– Ultimately, the EUR/USD currency pair rose following the release, indicating that investors were discounting a prolonged tightening cycle or perhaps skepticism about the Fed’s ability to maintain higher rates for long.
EUR/USD Response:
– The EUR/USD pair climbed above 1.0930 shortly after the CPI release.
– This move was driven in part by positioning and technical factors, but also by divergence in rate expectations between the Fed and the European Central Bank (ECB).
– Market participants may have viewed the Fed as nearing the end of its tightening cycle, even with persistent inflation, while the ECB remains cautious on rate cuts.
Stock Market Response:
– U.S. equity indices opened the session with gains but showed divergence among sectors.
– Technology and growth stocks, which are sensitive to rate
Read more on EUR/USD trading.