U.S. inflation remains stable in July, inflation pressures likely to build through remainder of 2017

U.S. inflation has remained stable in July. The weakness in U.S. inflation has not yet waned. The headline inflation rate rose 0.1 percentage point to a still tepid 1.7 percent year-on-year in July, while the core rate remained the same at 1.7 percent. In the past three months, the core inflation was up a soft 1.2 percent annual rate. A core CPI inflation pace at 1.7 percent is in line with a core PCE inflation pace, the Fed’s preferred measure, at an unchanged 1.5 percent in July, much below the target rate of 2 percent.

With a tight and tightening labor market and a subdued USD, the case of a slightly stronger underlying inflation pressures continue to be strong, noted Nordea Bank in a research report. The 7 percent depreciation of the trade-weighted USD since early January is believed to stop the decline in core inflation.

Looking into details, a slight decline in energy prices on the month, countered a 0.2 percent sequential rise in food prices, leaving headline inflation matching core. Prices were also up for shelter, medical care, recreation, apparel, motor vehicle insurance and airline fares all increased in July. These rises were slightly countered by drops in prices for new vehicles, used cars & trucks and household furnishings and operations.

The outlook of inflation is important for the outlook for the Fed’s monetary policy. A rising chorus of Fed officials has started to voice more uncertainty upon the bank’s capability to reach its inflation target in the near-to-medium term, stated Nordea Bank. Therefore, if core inflation undershoots estimates again, it might have significant policy implications.

According to a TD Economics research report, inflation pressures in the U.S. is expected to build through the rest of the year; however, the process is proving slower than anticipated. This adds significant risk to the rate of Fed hikes in the remainder of this year and in 2018.

“We continue to expect that the Fed will announce to start slowly shrinking its balance sheet at the next FOMC meeting on 19-20 September and that the bank will deliver one more rate hike in December, the third this year and the fifth in the current cycle”, added Nordea Bank.

At 16:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -51.1905. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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