Thursday is the first day this week when important macroeconomic data are released. The calendar was completely empty Monday through Wednesday. The ECB meeting and its possible decisions will not be analyzed in this article as they have nothing to do with the American economy and the US equity market. Meanwhile, today's US inflation report is worth our close attention.
Firstly, inflation in the US accelerates on a monthly basis. All Jerome Powell's forecasts made in the second six months of 2021 turned out to be inaccurate. He believed that inflation would begin to slow down by itself as soon as pandemic-induced pressure on the economy starts to ease. Interestingly, no one has remembered about the pandemic over the past two weeks, which brings up a question: was there a pandemic at all? However, supply chain issues still remain. A huge number of sanctions against Russia and Belarus imposed recently seems to have caused greater disruption. Yesterday, the US banned imports of Russian oil, gas, and coal. Now companies and plants in the US will have to substitute hydrocarbons imported from Russia. They will unlikely replace them at a cheaper price. Otherwise, Russian oil and gas would have long gone from the US market.
Above all else, oil and gas are now trading at record highs, which means they will drive other prices, including goods, services, production, logistics, etc., up. One thing is clear: if the current price of oil stands at $130, it does not mean it will be bought at this price worldwide. Some contracts for delivery are signed several years in advance and have fixed prices. In other words, rising oil and gas prices will have a long-lasting effect. They will grow slowly and depend on how long oil and gas stay at their highs - the longer, the higher the inflation.
So, today's inflation report is likely to show yet another spike in consumer prices. However, the trend is more important than the outcome of a single report. Even if inflation does not accelerate from January, the general trend will still remain. Markets may react to the inflation report but how strong the reaction will be is to be seen. The previous two reports pushed the dollar down. However, it was able to recover in a matter of hours. One thing is clear: new accelerations in inflation no longer increase the likelihood of stronger and faster rate hikes in the US. The chance is already tremendously high.
