Investor’s reaction to Consumer Price Index data was extremely short-sighted

U.S. Treasury Secretary Janet Yellen was very vocal about how Americans did not properly focus on the big picture as it pertains to yesterday’s CPI report. While acknowledging that the data revealed yesterday that inflation was fractionally higher than expectations, she believes that the real focus should have been on the big picture. In other words, market participants should have been focused on the fact that longer-term data reveals the decline in inflationary pressures is extensive, sustainable, and clearly on a path to the Fed’s 2% target.

Speaking today at the Detroit Economic Club, Secretary Yellen was quick to point out that, "I think it is a tremendous mistake to focus on minor fluctuations and to have failed to see the longer-term and bigger trends. And the trend here is that inflation is moving decisively down,".

She pointed out that the “burst of inflation” following the COVID-19 pandemic has subsided almost to levels consistent with the US central bank's 2% annual inflation target. While acknowledging that Americans had been faced with difficult times with the pandemic and the subsequent rising prices of essential goods and services. However, she tempered the hardship Americans face concerning rising costs with the fact that wages are increasing faster than rising essential goods and services.

Secretary Yellen said that yesterday’s CPI report showed average hourly earnings went up over the last year by 1.3%, with a 1.6% increase for blue-collar workers.

"Over time, as inflation normalizes at a very low level, and wages continue increasing, American households will feel more secure this episode is behind them, and they'll be able to see they're getting ahead."

To illustrate that point, she said that Treasury research data reveals that that workers earning the median U.S. wage can afford the same basket of goods and services as in 2019, but with $1,400 in savings left over.

Yesterday’s exaggerated reaction to the Consumer Price Index in January had lessened   substantially with the dollar declining fractionally, U.S. equities trading higher on the day, and the strong $25.80 decline in gold futures softening to a fractional decline today of $2.90. 

As of 5:55 PM ET gold futures basis most active April contract is currently fixed at $2004.30, the dollar has declined by 0.23% taking the dollar index to 104.61, and the Standard & Poor’s 500 gained 47 points or 0.96% and is fixed back above 5000 at 5000.63.

Wishing you as always good trading,