US inflation preview:

After a hike in March, the US Federal reserve has forecasted at least two more hikes in 2017, however, the actual hikes and the path forward would depend a lot on the actual inflation readings.

Why important?

• Fed’s dual mandate is price stability and maximum employment. However, the Unemployment rate has now reached 4.8% 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 the most vital mandate for subsequent hikes.

• As inflation expectations increased, the fed projected three rate hikes for 2017. Hence, the actual inflation would need to evolve in such manner to warrant hikes. Recently, some measures of inflation have reached Fed’s 2 percent medium-term goal.

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

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 2016 it showed further signs of a bounce back, with 0.9 percent y/y. Consumer price index was up 1 percent in June 2016 and 0.8 percent in July on a yearly basis. In August it picked up further to 1.1 percent y/y. It rose again in September by 1.5 percent and by 1.6 percent in October. It rose further to 1.7 percent in November. 2016 ended with 2.1 percent y/y inflation. Headline consumer price growth reached 2.5 percent in January this year. Look at the above chart for greater clarity.
• In addition to that, core CPI has been showing remarkable resilience, monthly growth not falling below zero since February 2010. It ended the year with 2.2 percent growth in prices.
• CPI has reached the highest level since early 2012.

Expectation today –

• CPI is expected to grow 0.2 percent m/m and rise by 2.3 percent on yearly basis.
• Core CPI is expected to grow at 2 percent on yearly basis.

Impact –

• Further firming up of the consumer price index (CPI) is likely to boost the odds of rate hikes for 2017 however, it may fail to provide the necessary boost to the dollar as the focus remains on political tensions in Washington with regard to President Trump’s firing of Comey and also on the trump’s ability to pass the tax proposal through congress.