Highest on Record Inflation Pushes Fed for Robust Rate Hike Thereby Further Strengthening USD

U.S. consumer prices rose month-on-month at the fastest pace in 16.5 years in March, as disruptions in global logistics aggravated and the military conflict between Russia and Ukraine pushed gasoline prices up to record highs. In March, average gasoline prices soared to an all-time high of $4.33 a gallon, according to the AAA Agency. Russia is the second largest exporter of crude oil in the world. The United States has banned imports of Russian oil, liquefied natural gas and coal as part of a series of sanctions against Moscow over its sting operation in Ukraine.

While gasoline was the main driver of inflation last month, food and services such as rental housing also made a significant contribution. The consumer price index rose 1.2% last month, the biggest monthly gain since September 2005, the Labor Department said on Tuesday. The consumer price index rose 0.8% in February.

In the 12 months to March, the consumer price index accelerated to 8.5% YoY. It was the biggest year-on-year increase since December 1981, following a 7.9% jump in February. It was also the sixth month in a row that the annual consumer price index was above 6%. Economists polled by Reuters had expected consumer prices to rise 1.2% in March and 8.4% YoY. In addition to rising gasoline prices, the Russian-Ukrainian conflict, now in its second month, has driven global food prices up, as Russia and Ukraine are also major exporters of commodities such as wheat and sunflower oil.

High inflation followed last month's data showing that the unemployment rate eased to a new two-year low of 3.6% in March. The news strengthened the case for a 50 basis point Federal Reserve interest rate hike next month. Now the Fed rate is set as a range of 0.25-0.50%. That is, the Fed’s real rate is now negative -8%. The market rate on 10-year Treasuries is 2.8%, while the real rate is minus -5.6%.

The US central bank raised its interest rate by 25 basis points in March, the first increase in more than three years. The minutes of the policy meeting released last Wednesday appear to have set the stage for significant rate increases going forward. High inflation and a hawkish stance by the Fed have left the bond market wary of a U.S. recession, though most economists expect growth to continue.

Many believe that March could mark the peak of the annual CPI but warn that inflation will remain well above the Fed's 2% target until at least 2023.

Meanwhile, currently the DXY Dollar Index is peaking above the dangerous 100 mark, highest since the beginning of Covid-19 pandemic in early 2020. As we all remember well, it required the Fed to inject cumulatively about $2.5 trillion in extraordinary support measures to stabilize the situation. This time the Fed’s ability to repeat its 2020 rescue scenario is limited by its new mandate of curbing violent consumer price growth.