Higher US core inflation adding to Fed's confidence

The recent data on US core inflation surprised to the upside as short term momentum (3-month change) has moved quite a bit higher. This is quite important because one of the conditions that the Fed has outlined for 'lift-off' is that it is 'reasonably confident that inflation will move back to its 2 percent objective over the medium term'. 

This week FOMC vice chairman William Dudley stated that 'most of the impact from the decline in energy prices that has weighed down overall inflation is likely over' and that 'the level of slack in the labour market has diminished sufficiently so that one might expect firmer wage gains going forward'. Last week the Fed's Fischer said that he saw signs of a pick-up in US wage growth.

"The bottom line is that inflation and wage developments are underpinning a rate hike in the June-September window and we still see September as the most likely time for liftoff. What will be important is how growth and the labour market develop in coming months. A recovery in US growth and continued decent job gains would pave the way for the first rate hike." - said Danske Bank in a report