Market Wire - US Price Growth Beats Forecasts, Propelling Dollar Higher

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

Annual inflation rose more than expected in April, keeping pressure on the Federal Reserve to raise rates more sharply. According to data released by the Bureau of Labor Statistics this morning, the consumer price index climbed 8.3 percent in April from the same period last year, up a seasonally-adjusted 0.3 percent from March. Markets expected 8.1 percent and 0.2 percent gains, respectively. 

A -2.7 percent drop in energy prices was partially offset by a 0.9 percent increase in food costs. Shelter rose 0.5 percent and services inflation roared back, with medical care up 0.5 percent, transportation up 3.1 percent, and airline fares jumping 18.6 percent. New vehicle prices ratcheted 1.1 percent higher, while used cars fell -0.4 percent. 

With highly-volatile food and energy components excluded, core prices rose 6.2 percent year-over-year, up 0.6 percent over the prior month. This was faster than the 0.4 percent expected in markets. 

This comes after the New York Fed released a survey on Monday showing that consumer inflation expectations fell to 6.3 percent at the one-year horizon in April, and rose to 3.9 percent at the three-year horizon. And markets had seemingly regained confidence in policymakers over the last two weeks, with five- and ten-year inflation breakevens tumbling sharply. 

Traders are rushing to reprice the front end of the interest rate curve, with two-year yields jumping by more than their ten-year equivalents. The Federal Reserve is now expected to hike rates by another two percent over its next four meetings, and the dollar is trading on a stronger footing as yield differentials tilt back toward the United States. Risk appetite is taking it on the chin more broadly, with equity indices tumbling ahead of the open, commodities coming under pressure, and high-beta currencies like the Canadian dollar selling off.