Among Major economic Events on Wednesday was the release of the consumer price index by the U.S Bureau of Labor Statistics.

In February, The CPI year over year has increased strongly from 1.4% in January to 1.7%, whereas the Core CPI has declined by one basis point from the previous month from 1.4% to 1.3%.

The headline inflation data has matched the market expectation of 1.7% YoY, while the core inflation missed the market consensus of being stable at around 1.4%.

The decrease in core inflation gave a feeling of relief that flooded investors, as they expect the pace of increase in inflation will slow a bit.

This, along with The Long-awaited President Biden’s $1.9 trillion coronavirus stimulus bill approval, helps Wall Street to be in a risk-on mode, with a recovery in major U.S indices except for the NASDAQ, and a decline in the dollar.

Actually, as we have previously anticipated about inflation, the February base effect for core inflation was a bit tougher, which has pushed core CPI lower.

For the upcoming months, the rise in both headline and core CPI is expected to be so sharp and so fast, as the base effect of the previous year would represent a strong tailwind pushing inflation upwards.

Other key factors:

The continuous rise in energy prices, as well as many commodities, is an obvious sign of the rise in inflation.

In addition, input costs for many businesses and industries are sharply increasing. The institute of supply and management's purchasing managers' price index has shown a continuous increase in prices paid by businesses for raw materials and services.

The same observation was made also in the Federal Reserve beige book as they mentioned that:

“nonlabor input costs rose moderately over the reporting period, with steel and lumber prices increasing notably. In many Districts, the rise in costs was widely attributed to supply chain disruptions and to strong overall demand. Transportation costs continued to increase, in part due to rising fuel costs and capacity constraints. Reports on pricing power were mixed, with some retailers and manufacturers affected by input cost increases reporting the ability to pass prices through, while many others were unable to raise prices. Several Districts reported anticipating modest price increases over the next several months.”

Source: ISM, BLS

As we see in the graph above, the ISM PMI prices is a leading indicator for headline inflation, especially when input cost prices pass through to the final consumer. The strong correlation between the two indicators makes the case for a sharp expected rise in inflation.