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After a few months of acceleration, inflation moderated this month surprisingly led by a decline in energy prices! This gave the dollar some support as reactions in the market showed the greenback increasing but the forces of confidence were too strong…

The Labor Department released in their report the CPI reading for the month of February coming in flat from the previous reading of 0.4%. The annual reading also showed deceleration to 4.0% from 4.3%.

As for the core prices - excluding volatile food and energy costs- were also flat in February opposing the expected and previous readings of 0.2% and 0.3% respectively marking the lowest rate since November 2006. The year on year reading slipped also to 2.3% from 2.5%.

Energy prices fell 0.5% in February making it the biggest drop since last August but this might just be on the short-term since nowadays we’re seeing new record highs in the oil market as it breached the $111.00 per barrel level. Gasoline prices dropped in the beginning of the month by 2% according to a survey conducted by economists but later jumped heavily. Electricity prices fell 0.3%.

Prices for medical care increased a slim 0.1% while clothing prices fell 0.3%, the biggest drop since last August. Transportation prices dropped 0.7% led by airline fares and new vehicle prices falling. Food prices rose 0.4% on the month. Housing prices, which accounts for 40% of the CPI index, rose 0.2% for the second consecutive month while rent increased by 0.2% as well.

CPI rates are still above the end of the Fed’s comfort zone of around 1.5%-2.0% but Fed officials now expect inflation to moderate in coming months after the release of the latest CPI data. This still doesn’t mean that risks have vanished since oil prices are still on the rise.

With these numbers out odds for a 75 basis point cut in the next Fed meeting on Tuesday is expected but still giving the Feds a wider range to cut rates. However, with the ripple effects from both the housing and credit crunch still does not suggest that the next rate cut is the end.

In another report, The University of Michigan released its Confidence preliminary reading for the month of March coming in at 70.5 slightly higher than the expected reading of 70.4 and lower than the prior reading of 70.8. This is the lowest reading in 16 years. The current conditions index improved to 84.6 from 83.8.

Gold prices spiked to breach the $1000 per ounce psychological level and the dollar started to loose grounds against the majors. With the rate cut to come, there is no floor to support the greenback! I guess the lows are still to be seen so dear reader place your bets on how far down the dollar will go and how much of a cut we will be witnessing…

Crown Forex

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