Consumer Price Index Growth to Approach Federal Reserve’s 2% Inflation Target

VaselineSeptember 11, 2024

0 5 minutes read

Consumer Price Index Growth to Approach Federal Reserve’s 2% Inflation Target

The US Consumer Price Index is expected to rise 2.6% from a year ago in August, a weaker pace than the 2.9% increase in July.
Annual core CPI inflation is expected to hold steady at 3.2%.
Inflation data could alter the odds of a 50 bps Fed rate cut in September and shake the US dollar.

The Bureau of Labor Statistics (BLS) will release the highly anticipated United States (US) consumer price index (CPI) inflation data on Wednesday at 12:30 GMT.

The US dollar (USD) is bracing for intense volatility as any surprise in the US inflation report could have a significant impact on market pricing in expectations of a September Federal Reserve (Fed) interest rate cut.

What to expect in the next CPI data report?

US inflation, as measured by the CPI, is expected to rise at an annual rate of 2.6% in August, down from the 2.9% increase reported in July. Core CPI inflation, which excludes volatile food and energy prices, is expected to remain unchanged at 3.2% over the same period.

Meanwhile, CPI and core CPI are expected to rise 0.2% month-on-month, equal to July’s increase.

Previewing the August inflation report, “we expect core CPI prices to remain largely under control in August, posting a fourth consecutive gain below 0.2% m/m. Services inflation will play a key role as shelter prices fall,” TD Securities analysts said in a weekly report. “Headline inflation is likely to remain subdued as energy prices return to deflation. Our unrounded core CPI forecast at 0.14% m/m suggests higher risks to a rounded 0.2% increase.

Following several inflation readings in a row, Federal Reserve policymakers have made it clear they will shift their focus to the labor market amid growing signs of a cold snap. “We have a little more tolerance for a positive surprise on the CPI because the longer arc shows that inflation is coming down,” Chicago Fed President Austan Goolsbee said recently.

Economic indicator

Consumer Price Index (L/M)

Inflationary or deflationary trends are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled monthly and published by the US Department of Labor Statistics. The monthly figure compares commodity prices in the reference month with the previous month. The CPI is a key indicator for measuring inflation and changes in purchasing trends. Generally, a high reading is seen as bullish for the US dollar (USD), while a low reading is seen as bearish.

How could the US CPI report affect the EUR/USD?

Market anticipation of a 50 basis point Fed rate cut in September will be tested when September inflation data is released.

Following August’s mixed jobs report, the likelihood that the Fed will cut the policy rate by 50 bps at its next meeting fell below 30 percent from nearly 50 percent earlier in the month, according to CME Group’s FedWatch Tool. The US Bureau of Labor Statistics said on Friday that non-farm payrolls rose by 142,000 in August. This reading followed the 89,000 increase (revised from 114,000) recorded in July and fell below the market forecast of 160,000. On a positive note, the unemployment rate fell to 4.2 percent from 4.3 percent in July, and annual wage inflation, as measured by the change in average hourly earnings, rose to 3.8 percent from 3.6 percent.

Market positioning suggests it will take a significant miss in the CPI data for investors to reconsider a big rate cut next week. If the monthly core CPI is at 0% or in negative territory, the immediate reaction could revive expectations for a 50bps cut and trigger a selloff in the US dollar (USD). On the other hand, a 0.3% or stronger rise could confirm a 25bps cut and help the USD remain resilient against its rivals. However, the fact that such a rate decision is already heavily priced in shows that the USD doesn’t have much room to move up.

Eren Sengezer, European Session Lead Analyst at FXStreet, provides a brief technical outlook for EUR/USD and explains: “The short-term technical picture of EUR/USD highlights a lack of buyer interest. The pair remains well below the 20-day simple moving average (SMA) and the relative strength index remains near 50.”

“EUR/USD could face first support at 1.1000, where the 38.2% Fibonacci retracement of the two-month uptrend that started in late June is located. Below this level, the 50-day SMA and 50% Fibonacci retracement form the next support area at 1.0950-1.0930. On the other hand, if the pair breaks the 1.1070-1.1080 resistance (23.6% Fibonacci retracement, 20-day SMA), it could target 1.1200 (the end of the uptrend) and 1 .1275 (July 18, 2023, maximum). “

US Dollar FAQ

The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of a significant number of other countries where it is found in circulation alongside local banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions . QE usually leads to a weaker US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineSeptember 11, 2024

0 5 minutes read