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Is the Market Discounting Higher Inflation Expectations?

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US inflation in April

According to the data provided by the US Bureau of Labor Statistics, the US Consumer Price Index, or the inflation index, rose 0.2% in April compared to its 0.1% fall in March. This inflation figure didn’t meet the market’s expectation of a 0.3% rise.

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Components of the inflation index

The rise in the inflation index in April was mainly the result of improvements in the prices of gasoline, energy, food, medical care, and shelter. The energy index rose 1.4% in April. The gasoline index rose 3% in the month. The food index rose 0.3% in the month.

However, on a year-over-year basis, US inflation (SPY) rose 2.5% in April compared to 2.4% in March. US core inflation, which excludes food and energy prices, remained flat in April compared to March at 2.1%. The yearly inflation figure met the market’s expectation of a 2.5% gain. It was the strongest improvement since February 2017.

Impact on the economy and market

Improvements in commodity prices and crude oil prices have mainly driven inflation higher in the economy. Higher inflation expectations have already been discounted in market prices. The rising ten-year bond yield has already signaled that inflation, along with interest rates, is going to rise.

After the announcement of April’s inflation figure, the S&P 500 Index, the NASDAQ Composite Index (QQQ), and the Dow Jones Industrial Average Index (DIA) rose 0.92%, 0.88%, and 0.80%, respectively, on May 10. The expectation of a faster rate hike process in the economy is also gradually being discounted in the market’s movements.

In the next part of this series, we’ll analyze the performance of US retail sales in April.

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