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Analytics, 15 September 2022

August US inflation higher than expected

Markets were sent on a rollercoaster on Tuesday and Wednesday, following the release of the August Consumer Price Index (CPI) report on Tuesday and the August Producer Price Index (PPI) report on Wednesday by the Bureau of Labor Statistics.

According to the CPI report, inflation came in worse than expected. Declining prices in gasoline, energy, and airfare - the main drivers of inflation in recent months - were expected to lower inflation but those declines were offset by gains in the costs of rent, food, and health insurance.

Following the CPI report, stocks in the US declined with all major indices taking a hit for the day. The PPI report on Wednesday eased off the losses, as the PPI fell for a second straight month. This was majorly influenced by the further decline in gasoline prices for the month of August.

On Wednesday, the dollar also slipped against a basket of currencies while U.S. treasury prices fell. The gains on Wednesday were relatively minor compared to the declines on the previous day.

In this article, we analyze further the two reports and what they mean for global markets.

August Consumer Price Index report

Global markets were hit hard by the August consumer price index (CPI) report in the U.S., which was released on Tuesday 13th, and indicated that inflation came in as worse than expected. Declining prices in gasoline, energy, and airfare - the main drivers of inflation in recent months - were expected to lower inflation but those declines were offset by gains in the costs of rent, food, and health insurance. Health insurance rose 24.3% year-over-year while food at home and rent prices were up 13.5% and 15.8% respectively.

The CPI rose 8.3% in August from a year earlier, a mild slowdown from the 8.5% reported for July. On a month-over-month basis, inflation rose 0.1% from July, when inflation remained unchanged, which many economists and politicians saw as a huge success. This was higher than the expected 8.1% increase by Wall Street analysts, leading to a massive selloff with investors wary of the possible risk that the Federal Reserve may now hike the Fed Funds rate by a full percentage point next week. Most analysts, however, still expect a 75 basis point hike.

With the Fed expected to announce the next interest rate hike next week, it is important to note that the recent jobs report, which showed that the labor market is starting to slow amid rising labor costs, indicates that the Fed’s policy changes are starting to take effect. However, with a still very strong labor market and high inflation, there is little reason for the Fed to stop its aggressive approach just yet.

How did the markets react to the CPI report?

Following the CPI report, stocks in the US declined with all major indices taking a hit for the day.

The Dow sank nearly 4%, while the S&P 500 lost 4.3%. The Nasdaq Composite dropped 5.2%. It was the biggest one-day slide for all three averages since June 2020.

In Europe, the London FTSE 100 ended 1.1% lower on the day, having climbed over 7,500 before the news, while the CAC shed 1.2% in Paris, and the Frankfurt DAX was also 1.4% lower.

In Asia, the markets were hardly moved by the news with Japan’s Nikkei climbing almost 0.3% while the Hang Seng rose 0.1% in Hong Kong, and the Shanghai Composite edging just 0.05% higher.

Elsewhere in currencies, the US dollar maintained its recent gains as the currency surged for the day, indicating that Japan is preparing to intervene in foreign exchange markets to support the yen.

In cryptocurrencies, Bitcoin (BTC) rose 15% over the weekend in anticipation of a positive report for August but dropped 4% after the new numbers were released. Ethereum (ETH), which has largely been trading in an upward trend because the Merge, a software update on the Ethereum blockchain that is set to take place this week, dipped over 7%.

August Producer Price Index Report

Stocks in the US recovered on Wednesday, 14th September, as the US August Producer Price Index (PPI) fell for a second straight month, to make slight recoveries from Tuesday’s selloff. This was majorly influenced by the further decline in gasoline prices for the month of August.

The producer price index for final demand dipped 0.1% in August after slipping 0.4% in July, the first back-to-back decline in the PPI since the spring of 2020. In the 12 months through August, the PPI rose 8.7%. That was the smallest year-on-year gain since August 2021 and followed a 9.8% increase in July, a factor that could effectively allay fears of inflation becoming entrenched.

A 12.7% decline in the cost of gasoline led to a 1.2% drop in prices for goods, which effectively accounted for the fall in the monthly PPI. The report also showed underlying producer inflation rising moderately last month, suggesting that snarled supply chains were loosening up. This helped ease the sentiment among investors on rampant inflation as indicated by the CPI report announced on the previous day. “While inflation isn’t completely contained, there is hope that the diminished pressures on PPI goods prices will lead to less inflation in the future for the goods sitting on store shelves that consumers buy”, said Christopher Rupkey, chief economist at FWDBONDS in New York

How did the markets react to the PPI report?

Stocks on Wall Street were trading higher after Tuesday’s sharp sell-off. The dollar slipped against a basket of currencies. U.S. Treasury prices fell. The gains were relatively minor compared to the declines on the previous day.

The Nasdaq rose 0.74% while the S&P 500 added 0.34% to close. The Dow Jones Industrial Average inched up 30.12 points, or 0.10%, to 31,135.09 after being down more than 200 points at session lows. There were however more losers than winners for the day with declining stocks slightly outnumbering gainers in the S&P 500. Materials stocks slid, with an 11% drop for Nucor leading to the decline.

Energy stocks on the other side performed well in the S&P 500 as oil prices perked up on Wednesday. Shares of Coterra Energy and APA jumped more than 7% each. Devon, EOG, and ConocoPhillips were also among the top performers in the S&P 500. Overall, the Energy Select Sector SPDR Fund was up 3.4%, easily outpacing the broader market.

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