US CPI- Yesterday US CPI figures for December met market expectations coming out at 7%, its highest in 39 years. These figures further refute the Fed’s initial predictions that inflation would merely be transitory as monthly inflation prints have incrementally grown from January’s 1.4% print to November’s 6.6% print and now up to December’s 7%. Indeed, yesterday’s figures indicated the largest increase in the annual rate of inflation over 12 months in history. To put this in further perspective, the pre-existing record was set between March 1974 and February 1975 when the annual rate of inflation increased from 5.77% to 11.86% (they topped out at 18% later that decade)

Inflation- The headlines have of course centred around how the rising cost of energy (29.3% y-o-y rise) and used cars (37.3% y-o-y rise) have played a primary role in effecting inflation figures. However, it’s also worth noting that the data indicated a 3.7% rise in Services less energy services which is significant given how services are heavily related to labour costs and are generally unlikely to fall. Hence, the fact that such rises in costs of services are generally ‘sticky’ further reveals how inflation is far from transitory. Moreover, yesterday’s figures showed that food prices in the US have increased by 6.3% which is concerning for many Americans increasingly worried about the rising cost of living being here to stay. For example, in the run up to Christmas we learnt that Dollar Tree – the largest dollar-store chain in the US by store count – was rising its prices to $1.25 after 66 years of keeping prices at a dollar. Hence, yesterday’s data will no doubt add pressure on the Fed to consider raising rates faster than expected. Later this month on the 25th and 26th January, the FOMC gather to decide their monetary policy and the market is predicting a 4.5% chance of a hike in January and an 86% likelihood of a 25bp hike in March hike which would bring the rate to 0.5%. The market was well primed for the news though and overall remained relatively unmoved.

UK & EU Post-Brexit Trade- The UK and EU sit back down and talk about post-Brexit trade today, for the first time this year and the first time with new lead negotiator, Liz Truss. Ms Truss is rolling out the red carpet to Maroš Šefčovič, who will be staying overnight at Chevening rather than spending a couple of hours in Whitehall. Expectations will be high, and the hope is that a fresh face for negotiations might lower the temperatures that we saw pre-Christmas and lead to progress – we got to the point that the EU had acknowledged that the original plans weren’t fit for purpose and made several significant concessions to try and alleviate pressures, but still insisted on the ECJ being the ultimate arbiter of disputes. Lord Frost wasn’t happy with this and it’s unlikely Liz Truss will be either, but hopefully pragmatism becomes the order of the day, as presumably she’ll want this wrapped up quickly to be free for the forthcoming leadership contest.

Looking Ahead- Today’s economic calendar mostly consists of tier two data. The one to watch will be the UK GDP estimate for the last quarter of 2021, though as we’ve seen through the pandemic, these numbers can be treated as yesterday’s news and have a limited impact on the market. On the micro level, there are a host of companies announcing their own Q3 results this morning, so expect the FTSE index to have a bit of a flurry this morning. It’s worth a nod to JD sports’ numbers from yesterday, where the business announced stellar earnings and cited the US stimulus cheques as a big contributor to that success (this is surprising, as we though that most of that money had gone on cryptocurrency!

Have a great day.

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