FxWirePro: US inflation numbers amid inflation worries

Today’s release of Consumer price index (CPI) numbers from the United States will be most watched data by traders and investors. CPI is scheduled to be released at 13:30 GMT. Today’s CPI figure, if turns out to be very good should be enough for Fed to go for a hike next month.

Why important?

• Fed’s dual mandate is price stability and maximum employment. However, Unemployment rate has now reached 4.9 percent in the US, which is considered as very close to long long-term employment level, consistent with Fed’s dual mandate. That leaves inflation to be most vital for subsequent hikes.

• Several Fed policymakers have indicated that without pickup in inflation, there would be no rate hikes. However, September FOMC was quite divided in their opinion.

• Moreover, inflation numbers will be key determinant of exchange rate divergence among major economies in the coming months

Past trends –

• After staying below FED’s 2 percent target, headline CPI fell to negative territory in final quarter of 2014. In January CPI fell by -0.7 percent on monthly basis, mostly due to lower energy prices. Yearly CPI fell by -0.1 percent y/y in January.
• Yearly change in CPI has been minimal since then, growing about 0.04 percent per month.
• Yearly CPI growth was +0.7 percent in December, a first sign of comeback. In Mach it showed further signs of bounce back, with 0.9 percent y/y. Consumer price index was up 1 percent in June and 0.8 percent in July on a yearly basis. In August it picked up further to 1.1 percent y/y. It rose further in September by 1.5 percent.
• In addition to that, core CPI has been showing remarkable resilience, monthly growth not falling below zero since February 2010. In March, it grew 0.1 percent m/m and 2.2 percent from a year back and in June it grew by 2.3 percent. In September, it was up 2.2 percent y/y.

Expectation today –

• CPI is expected to grow 0.3 percent m/m and rise by 1.6 percent on yearly basis.
• Core CPI is expected to grow at 2.2 percent on yearly basis.

Impact –

• The dollar has already been performing strongly due to the hopes that the Federal Reserve would go for faster rate hikes as newly elected Donald Trump’s fiscal policies would strike higher growth and inflation. A better number today, likely to push the dollar further.