US inflation has risen much stronger than expected. The report of the Department of Labor yesterday stated that consumer prices jumped to 0.8% in April, well above the forecast of only 0.2%. This led to investors fearing that the Fed will raise interest rates much earlier than scheduled.
But on the bright side, such news increased demand for the US dollar. Accordingly, risky assets declined and hit new local lows.
The jump in US CPI is the largest seen since September 2008. It is partly due to the sharp rise in used-car prices, which climbed to 10.0% in April. Food prices also increased, but more modestly - by 0.4%. Energy prices, on the other hand, fell by 0.1%.
As for core inflation, which excludes food and energy prices, a 0.9% increase was observed in April. This is also the largest growth recorded since April 1982. Apparently, there has been a significant acceleration in housing, airline, insurance and household furniture prices.
Although these sudden growths are alarming, analysts reassured that there is nothing to fear. They believe the Fed will not adjust their policies until maximum employment is reached.
The Department of Labor will publish April data on US PPI today. Analysts expect it to come out with a 0.3% gain.
But while the surge in inflation has no effect on the Fed, it poses serious threats to US President Joe Biden's plans. The latest data already suggests that the US economy is close to overheating, so Republicans believe that injecting more money is unnecessary. They said prices are already high, while problems in the supply chain are getting worse.
In short, there is little chance that Republicans will agree to Biden's new $ 4 trillion stimulus.
Going back to the Fed and its monetary policy, many market players are hoping for a rate hike next year. They believe the sharp inflationary jump will force the bank to increase rates by 2022, one year earlier to what the Federal Reserve has planned.
Treasury yields and market expectations also rose amid the 1.0% increase in monthly inflation rate.
Most likely, inflation will continue to grow in the coming months, thanks to record growth in retail sales and spending. But the pace may slow in the latter part of the year.
All this has led to a sharp decline in EUR / USD, from 1.2115 to 1.2060-1.2065. If the quote drops even lower, the euro will hit 1.2025 and 1.1990. But if bullish traders manage to bring the quote back to 1.2120, the euro will climb to 1.2180.
Unsurprisingly, the US is also suffering from a very high budget deficit. According to the latest reports, the gap has widened to $ 2 trillion, mainly due to Biden's bailout plan.
Biden plans to solve this by raising corporate and individual taxes, which is why he is proposing a new budget plan. However, the plan also includes more funds for infrastructure and social spending.
Going back to US inflation, Fed Deputy Chairman Richard Clarida added fuel to the fire when he admitted that he was surprised with the figure. Nevertheless, he reassured that this surge in inflation is short-lived.
