It is important to differentiate between disinflation and deflation, as the former is a deceleration of price increases while the latter is an actual drop in the price level. Last week’s US inflation report showed that consumer prices have risen by 6.4 percent over the past 12 months, the lowest annual increase since October 2021. This marks the seventh consecutive month of declining year-over-year inflation, continuing the disinflationary trend that even Fed chairman Jerome Powell acknowledged earlier this month.
The February US PMI’s showed a return above the 50 boom/bust mark for the first time since June 2022, with the services gauge leading the way and the manufacturing PMI’s improving at a more modest rate. Supply constraints have alleviated, and delivery times for inputs into factories are improving, causing the upward driving force on inflation to shift to wages in the tight labor market. This could potentially result in a wage-price spiral, something the Fed is closely monitoring.
The US Treasuries went into full sell-off mode yesterday following the February US PMI’s and hawkish Fed comments, with US yields ending the session 10 to 15 bps higher. US stock markets also lost 2% to 2.5%, with the dollar’s performance falling short of expectations. The outcome of the March meeting is looking increasingly likely to involve a 50 bps rate hike, and tonight’s FOMC Minutes will give an indication of how much dissent there was in favour of this move in February.
The sterling has profited from rising UK yields, and EUR/GBP is testing first support around 0.88. All of this suggests that inflation won’t come down as easily as hoped, and will be something to watch closely in the coming weeks.
0. “Disinflation vs Deflation” Electronics Weekly, 20 Feb. 2023, https://www.electronicsweekly.com/blogs/mannerisms/consumer/disinflation-vs-deflation-2023-02
1. “Disinflation Yes, Deflation No” Statista, 16 Feb. 2023, https://www.statista.com/chart/29328/consumer-price-index
2. “Outcome of Fed March Meeting Becoming Fat-Tailed Towards a Possible 50 bps Rate Hike” Action Forex, 22 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/487619-outcome-of-fed-march-meeting-becoming-fat-tailed-towards-a-possible-50-bps-rate-hike/