US inflation at multi-decade high

Daniel Richards - MENA Economist
Published Date: 13 January 2022


  • US CPI inflation hit 7.0% y/y in December, in line with expectations and up from 6.8% the previous month. This marked the fastest pace of annual price growth since June 1982. Prices were up 0.5% m/m, faster than the projected 0.4% but a moderation from recent months as some of the energy price pressures dissipated. Energy prices were a significant driver of the y/y price growth all the same, contributing 1.8pp, but the pressures were broad based and core inflation was at 5.5% y/y, the fastest pace since 1992.  Key drivers of the monthly rise in prices were used cars (3.5% m/m) and new cars (1.0%), likely linked to the ongoing issues with semiconductor supply. Meanwhile, the rise of the Omicron variant in December likely contributed to other price pressures in areas such as flights as staff shortages ensued. The high reading follows Fed chair Jerome Powell’s pledge to take aggressive action against inflation in front of the previous day’s select committee meeting. This acceleration was not unexpected but does underline the likelihood that rate hikes will now begin in March.
  • India’s industrial production expanded 1.4% m/m in November, missing projections of 2.8%, and markedly slower than the (upwardly revised) 4.0% seen in October. Manufacturing expanded just 0.7%, a marked slowdown from the preceding six months, and with Covid-19 cases spiking once more, the sector will likely remain under pressure over subsequent readings. Meanwhile, CPI inflation accelerated to 5.6% y/y, from 4.9% the previous month (but modestly slower than projections of 5.8%). The RBI has maintained an accommodative policy to now, but with price growth starting to test the upper limit of its target band, and with global price pressures still to the fore, the next move by the bank will likely be to hike rates.
  • IMF managing director, Kristalina Georgieva has cautioned that the Omicron wave which began at the close of 2021 poses a threat to the global recovery. In its October outlook the fund forecast global growth of 4.9%, with the latest World Economic Outlook due for publication this month. Georgieva also stated concerns around global debt levels which have been exacerbated by the pandemic crisis.

Today’s Economic Data and Events

11:00 Turkey industrial production, % m/m, November. Forecast: 0.5%.

17:30 US initial jobless claims, week to Jan 8. Forecast: 200,000

Fixed Income

  • US Treasuries absorbed the high December inflation print with little notice as the market may have been preparing for an even higher number. Market expectations for rate hikes this year were essentially unchanged after the CPI with futures markets still pricing in nearly 4 hikes, starting with one in March. In that mind yields on the 2yr moved higher overnight, closing up almost 4bps to 0.9189% while the 10yr added less than 1bps to 1.728%.
  • Across the rest of the developed market space bonds managed something of a relief rally with yields lower across bunds and gilts. On 10yr bunds yields fell more than 3bps to -0.061% while the 10yr gilt yield fell 3bps to 1.138%.
  • Emerging market bonds also showed some relief overnight with Turkish and South African bonds in particularly rallying. Yields on 10yr Turkish bonds fell more than 40bps to 23.03% while South African yields were off by almost 14bps at 9.851%.
  • In the regional primary market Saudi National Bank is pricing a benchmark 5yr USD sustainable sukuk at UST +110bps.


  • With US CPI coming in largely on target, currency markets may have been suffering from a “sell the fact” effect as the US dollar fell against all peers overnight. The broad DXY index dipped 0.74% to 94.915 with EURUSD provided a large share of the decline. The single currency rose 0.66% to 1.1442, its highest level since early November. USDJPY also showed some vigour for JPY with the pair down 0.57% at 114.64.
  • Sterling has also showed minimal reaction to the political noise in the UK even as the popularity of prime minister Boris Johnson ebbs considerably. GBPUSD added 0.5% overnight to settle at 1.37. Commodity currencies were also propelled higher, led by AUD overnight which rallied more than 1% to 0.7284 while USDCAD fell 0.5% to 1.2509 in favour of the loonie and NZD closed up 0.9% at 0.6850.


  • Asian markets took their cue from the previous day’s bullish response in the US to Jerome Powell’s testimony, with all major indices registering robust increases. The Nikkei was a key gainer, adding 1.9%, while Shanghai Composite added 0.8% and the Hang Seng 1.2%. In India, the Sensex shrugged off the higher inflation to close up 0.9%.
  • The optimism continued in Europe, as the composite STOXX gained 0.7%. The CAC and the FTSE 100 both added 0.8%, while the DAX closed 0.4% higher. In the US, the Dow Jones (0.1%), the NASDAQ (0.2%) and the S&P 500 (0.3%) all ended the day up.
  • Locally, the Tadawul was the key gainer, adding 1.0%. The DFM closed flat while the ADX gained 0.5%.


  • Oil prices moved higher again, supported by a decent draw in stockpiles reported by the EIA. Brent settled up 1.1% at USD 85/b while WTI moved within sight of USD 83/b, closing up 1.8%. Time spreads for both contracts are also moving up steadily with 1-2 month spreads at around USD 0.70b/ each.
  • The EIA reported a drop in US crude stocks of 4.5m bbl last week, falling to their lowest level since 2018. Gasoline stockpiles, however, showed a build of nearly 8m bbl while distillates were up 2.5m bbl. US oil production ticked lower by 100k b/d last week to 11.7m b/d while product supplied gained about 1m b/d to 20.8m b/d.

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