US March Annual Inflation Still at 40-Year Highs, What’s Next?

The year-on-year US inflation rate for March reached another 40-year high at 8.5 percent, making it more likely that the Federal Reserve will hike its key interest rate guidance by 0.5 percent in May. Tapering quantitative easing (QE) will also be a key theme in May as the central bank tightens monetary policy to cool inflationary pressures. The expectations of a hawkish Federal Reserve and higher interest rates support the USD’s strength in the second quarter.  

On a monthly basis, the US inflation benchmark rose by 1.2 percent in March versus February’s 0.8 percent, driven up by an 18.3 percent rise in gasoline prices and a 1 percent rise in food prices.  

Sharp spikes in fuel prices stem from supply-side fears in the crude oil markets that have prevailed since February 24 when the conflict in Ukraine began. Crude oil spot prices are still elevated with the potential for volatility amid the geopolitical uncertainty.

In related news, COVID-19 travel restrictions are being lifted in many regions, meaning an increase in demand for crude oil used to manufacture transportation fuel.  

Two sectors of the economy may see growth under these circumstances. Banking and other financial companies now have a brighter interest rate income outlook. The revenue prospects for energy companies also appear better because of rapidly increasing demand amid recovery from COVID-19 downturns. This scenario is complicated by losses to energy and banking companies which were active in Russia before the conflict.  

Wall Street earnings reports

Several publicly-listed companies in the energy, transportation and financial sectors report first-quarter earnings today. These include large cap financial firms JP Morgan Chase and Black Rock in addition to travel and energy companies Delta Airlines and Petrobras.  

In other trading news, the Bank of Canada announces its interest rate decision for April. The central bank is expected to raise its key rate from 0.5 percent to 1 percent and anything unexpected may move the CAD currency crosses.  

Wrapping up, the JPY crosses could be influenced by Bank of Japan Governor Kuroda’s speech this morning.