Inflation is a key factor that affects the economy, and the release of the CPI inflation reports provides important information for investors and policymakers. This morning, the latest CPI inflation report was released, and it came in higher than expected.
- The expectation was that inflation would be at 2.9%, according to experts.
- However, the actual figure turned out to be 3.1%, indicating higher inflation than anticipated.
While headline inflation (overall inflation) is noteworthy, economists pay more attention to core inflation, which excludes volatile factors like food and energy prices. Unfortunately, core inflation also showed no improvement:
- Core inflation was reported at 3.9%
- This is the same rate as the previous month, indicating a lack of progress in controlling inflation.
This poses a problem because it contradicts the Federal Reserve’s stance on interest rates. During their recent press conference, they emphasized that they would consider cutting interest rates if the inflation reports continued to show positive trends. However, with no improvement in core inflation, this report does not meet their criteria for a “good” report.
The impact of this news was immediately felt in the stock market:
- As soon as the report was released this morning and trading began, stock prices plummeted.
- Investors reacted negatively to the higher-than-expected inflation figures and adjusted their expectations accordingly.
Implications for Federal Reserve Meetings
The Federal Reserve holds regular meetings to discuss monetary policy decisions, including interest rates. The upcoming meetings on March 20th and May 1st are particularly significant in light of this new inflation report.
March 20th Meeting
- Just a month ago, market expectations were highly favourable for an interest rate cut at the March 20th meeting.
- According to the CME’s market expectations, the odds of a rate cut were estimated at 76%.
- However, after the Federal Reserve’s press conference and today’s inflation report, those odds have dropped significantly to 8%.
- The lack of improvement in core inflation played a major role in dampening expectations for a rate cut next month.
May 1st Meeting
- The subsequent meeting on May 1st is not too far away either, being just 2 and a half months from now.
- A month ago, the market was almost certain (99% probability) of an interest rate cut by that time.
- However, the recent inflation report has caused a shift in expectations, with the odds of a rate cut now standing at 39%.
- This change in sentiment indicates that investors are now less confident about the Federal Reserve’s plans for reducing rates by May 1st.
Overall, this inflation report has had a significant impact on market expectations and has created uncertainty regarding future interest rate decisions. Investors are closely watching for any signs of improvement in core inflation as they assess the likelihood of rate cuts in the coming months.
