Consumer Price Index (CPI) data for August were just released by the US Bureau of Labor Statistics. It released inflation metrics that exceeded already high market expectations. This month’s CPI report did reveal a new and modest inflationary trend, as compared to July. This unexpected news has sent shockwaves among investors and market participants who were counting on inflation pressures to begin to moderate. The economic implications of this data are important, as it serves a heavy-laden pressure on the US Dollar and impacts other key financial markets.
The CPI is a primary economic indicator. It’s a measure of the change over time in prices paid by consumers on average for a basket of goods and services that households buy. The August report confirmed that inflation is not only high, but stubbornly high. Consequently, the US Dollar has taken a big leg lower since the data was released. As market reactions indicated, participants were jumping at any sign that inflation was coming down. The real increase took them by surprise and forced novel recalibrations in multiple currencies and commodities.
The strong CPI figures helped lift the EUR/USD currency pair above the key 1.1700 level. This movement is a perfect illustration of the dynamic created by a weaker dollar. The GBP/USD exploded higher, triggering a bullish squeeze. This increase represents the effects of the dollar’s decline on other currencies. Gold prices struggled to remain above $3,650. This commodities focused battle, in part, demonstrated the power of that CPI release as within moments investors were scrambling to reposition themselves.
The timing of the CPI data’s release coincided with the European Central Bank’s monetary policy decision, amplifying its significance within the financial community. Economists pointed out that this data would be used to inform monetary policy making decisions at the US Federal Reserve moving forward. They are constantly judging inflationary movements against measures of economic growth.
So investors and analysts were intently focused on the August CPI numbers, knowing that these would be critical in determining plays in the capital markets going forward. With inflation still a significant concern, market participants will continue to operate in a world shaped by dynamic inflationary conditions and central bank reaction.