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Today’s release of Consumer price index (CPI) numbers will be most watched by traders and investors ahead of next week’s FOMC rate decision. CPI is scheduled to be released at 12:30 GMT. Today’s CPI figure, if turns out to be very good should be enough for Fed to go for a hike next week.
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-term unemployment level, consistent with Fed’s dual mandate. That leaves inflation to be most vital for subsequent hikes.
- Several Fed policymakers have indicated that without a pickup in inflation, there would be no rate hikes.
- Moreover, inflation numbers will be a key determinant of exchange rate divergence among major economies.
Past trends –
- After staying below FED’s 2 percent target, headline CPI fell to negative territory in the final quarter of 2014. In January CPI fell by -0.7 percent on a 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, the first sign of a 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 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. July, it was up 2.2 percent y/y.
Expectation today –
- CPI is expected to grow 0.1 percent m/m and rise by 1 percent yearly basis.
- Core CPI is expected to grow at 2.2 percent on yearly basis.
Impact –
- According to our analysis, four out of ten policymakers, having voting rights this year is likely to vote for a hike next week, so a good inflation figure (around 1.2 percent), should be enough for the balance in FOMC tilt towards the hawkish camp.
The dollar index is currently trading at 95.34, up by 0.11 percent for the day so far.
