Solid Inflation Figures Drive Currency Market Volatility

Currency trading has become more volatility in the wake of recent inflation data in the United States. While the futures market and conventional wisdom appear to have the Fed easing interest rates when they next meet in July, higher than expected inflation figures could put a fly in the ointment. Currency trading of the US dollar has picked up as investors speculate on whether the Fed will pull the trigger. The Fed has continued to receive criticism of its policy from US President Donald Trump.

Wholesale Inflation Edges Higher

US wholesale prices edged higher in June as energy weighed on prices offsetting an acceleration in services. According to the US Labor Department, the US producer price index for final demand edged up 0.1% last month after a similar gain in May. On a year over year basis in June, the PPI rose 1.7%, the slowing further from a 1.8% increase in May. Expectations were for June PPI to be flat and for its to rise 1.6% year over year. Excluding food, and energy and trade services components, producer prices were unchanged in June after rising 0.4% for two straight months. Core PPI increased 2.1% year over year in June after advancing 2.3% in May.

Retail Inflation Rises

Retail inflation rose to an 18-month high in June. While energy prices remain subdued, the core rate of inflation moved higher. The Labor Department reported that consumer price index excluding food and energy rose 0.3% last month. That as the largest increase since January 2018 and followed four straight monthly gains of 0.1%. Core CPI was boosted by strong increases in the prices for apparel, used cars and trucks. There were also strong increases in both rent and healthcare costs. On a year over year basis, in June, core CPI increased by 2.1% after rising 2% in May.

Headline Consumer prices were also higher. The Labor Department reported that headline CPI increased by 0.1% in June weighed down by energy costs. The CPI rose 0.1% in May. It increased 1.6% year over year in June after rising 1.8% in May. Expectations had been for headline CPI to be unchanged in June and increase 1.6% year over year.

Rising Inflation Lifts Yields

US yield has been declining and continued to remain under pressure following news that the Fed was likely to reduce interest rates in July. The stronger than expected inflation numbers helped buoy US yields pushing the 10-year yield back to 2.1% after it had dipped below 1.95% in early July.

The Fed is expected to decrease rates when it meets at the end of July on the 30 and 31st. Fed Chairman Jerome Powell told lawmakers that the Fed would act as appropriately to protect the economy from rising risks such as trade tensions and slowing global growth. Despite an uptick in the recent inflation figures, Powell said there is a risk that weak inflation will be even more persistent than we currently anticipate.

Policymakers from the U.S. central bank are scheduled to meet on July 30-31. The Fed last month downgraded its inflation projection for 2019 to 1.5% from the 1.8% projected in March.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.