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Latest inflation figures are good news 
Today’s release of Consumer price index (CPI) numbers will be most watched by traders and investors ahead of next month’s FOMC rate decision. CPI is scheduled to be released at 12:30 GMT. However, today’s CPI figure may turn out to be a non-event for the market the Fed isn’t expected to hike rates at least until December and even that is sliding too.
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.
- Several Fed policymakers have indicated that without a pickup in inflation, there would be no rate hikes.
- Moreover, inflation numbers will be the 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.
- 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.
Expectation today –
- CPI is expected to grow 0 percent m/m and rise by 0.9 percent yearly basis.
- Core CPI is expected to grow at 2.3 percent on yearly basis.
Impact –
- Without significant improvements in both core CPI and headline, the dollar is unlikely to reverse its slide. The core CPI below 2.6 percent and headline below 1.4 percent unlikely to boost the dollar because the oil price has been struggling to recover.
The dollar index is currently trading at 94.63, down more than 1 percent for the day so far.
