U.S. inflation numbers a key to further Fed rate hikes

The FOMC meeting yesterday projected three rate hikes for the next year, however, the actual path would depend lots on inflation figures over the year. Today, at 13:30 GMT, November inflation figures will be released from the US.

Why important?

• Fed’s dual mandate is price stability and maximum employment. However, the 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.

• As inflation expectations increase, the fed has projected three rate hikes for next year. Hence, the actual inflation would need to evolve in such manner to warrant hikes.

• 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 the 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, 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 August it picked up further to 1.1 percent y/y. It rose further in September by 1.5 percent and by 1.6 percent in October.
• 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 October, it was up 2.1 percent y/y.

Expectation today –

• CPI is expected to grow 0.2 percent m/m and rise by 1.7 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 after it was announced that the Federal Reserve would go for faster rate hikes as newly elected Donald Trump’s fiscal policies might strike higher growth and inflation. A better number today, likely to push the dollar further. The dollar index is currently trading at 103.1, the highest level since 2003.