U.S. headline CPI to post around 2% y/y early next year

The U.S. core CPI inflation rose to 1.9% y/y in September, up from 1.8% in August and stronger than anticipated. The stronger USD continues to put downward pressure on core inflation, mainly by driving down core goods inflation. 

However, once the impact of the stronger greenback and lower commodity prices fades next year, there is still very good reasons to expect inflation to accelerate, particularly as the economy is close to full employment and rental vacancy rates are near 30-year lows.

The drop in headline inflation of U.S. to zero in September might fuel speculations that the Fed will remain on hold well into 2016. However, the move back to zero is likely to be only temporary.

Thus unless oil prices continue to nosedive, fading base effects are bound to lift the headline inflation rate sharply in Q4 as the steep fall in energy prices fall out of the year-over-year rate.

A rebound in headline CPI inflation is expected to around 2% y/y early next year, as oil prices are likely to remain roughly unchanged at current levels, states Barclays.