The inflation problem is not yet solved

US stock indices gained again despite worse inflation data. The US dollar appreciated and gold reduced its value. US bond yields rose on both the short and long ends of the yield curve. Yesterday, concerns increased that the CPI is not falling as quickly as the Fed would like.

The source of price increases are services

A month ago, the sharp rise in US consumer prices in January, especially as measured by the core index excluding volatile energy and food prices, made many investors doubt that inflation would quickly fall to the central bank's target. Therefore, yesterday's February data was expected to shed light on the extent to which these were one-off or whether the decline in inflation is stopping.

US consumer prices rose 0,4% in February. compared to the previous month, as expected. The year-on-year indicator increased from 3,1%. to 3,2 percent. The more important core index, which does not include energy and food, was 0,4 percent. month-on-month, slightly above consensus. On a year-to-year basis, it decreased from 3,9%. up to 3,8 percent

Services are still the main source of price growth dynamics. They increased by 0,5%. which reflects a significant increase in wages. Last month, commodity prices partially compensated for this, now they increased by 0,1%. The overall CPI was higher due to the increase in fuel prices. Airline ticket prices have also gone up. What the Fed can be happy about is the decline in "supercore" inflation, which excludes food, energy and the so-called shelter.

Will the FED reject the classic cycle of regular cuts?

After yesterday's publication, the market did not change its valuation of the future path interest rates in Usa. It still gives just over 60 percent. chances that the cycle of reductions will start in June. At this point, market assumptions are already similar to the December conclusions from the dot plot, which suggested three cuts in 3 by a total of 2024 basis points. Next week we will receive an update on the median expectations of Fed representatives, which may shed new light on the further prospects for monetary policy.

Yesterday's data confirm the Fed's caution, which has not yet announced victory over inflation and preferred to wait for the next publications. If these turn out to be negative (read: higher), then the Fed may reject the classic cycle of regular cuts and decide only to gradually adjust the key parameters of its monetary policy, which would be beneficial for the USD. However, this turn of events is purely theoretical for now.

The EUR/USD rate dropped yesterday to a round level of 1,09 and is currently slightly above this level. Gold fell to USD 2160 and moved away from the records set on Friday after the NFP data. The stock market, despite higher CPI indicators, has grown, technological Nasdaq Composite gained 1,5 percent and the wide SP500 1,1 percent. The zloty lost its value. The EUR/PLN exchange rate rose above 4,29 and USD/PLN was above 3,93.

Source: Łukasz Zembik, OANDA TMS Brokers