Sliding into confusion

Daily update

The US administration’s current communication strategy is not entirely clear, but the consequence is volatility in financial markets. US Defense Secretary Hesgeth’s claims of escorting tankers through the Strait of Hormuz were denied. US President Trump’s warning against Iran mining the strait seemingly offered little deterrent. If the strait is mined, oil prices may stay higher for longer. IEA proposals to release a record quantity of strategic oil reserves kept oil prices calmer.
US February CPI predates this volatility, but matters to policy. Underlying inflation pressures revealed by today’s data should be benign. Central banks should react to general increases in prices—inflation—because that signals an imbalance in the economy. They lack the policy weapons to react single market issues. Fed Chair Powell can hardly order the FOMC to conduct mine sweeping operations in the Gulf.
The US affordability crisis is based on inflation perceptions, in turn dependent on high frequency purchases. The near 27% increase in gasoline prices from January lows will not register in today’s data, but consumers will notice soaring prices for selected grocery items.
German final February consumer price inflation was unchanged at 2% y/y—no surprise at all. The stable inflation environment in Europe allows the ECB to continue its policy of masterful inactivity.