US CPI Reaches Highest Point in Years

Daily Analysis - 19/01/2017

Consumer Prices Accelerate, Paving the Way for Further Policy Normalization

In another sign of broad-based improvements for the United States economy, the latest inflation figures released by the Bureau of Labor Statistics showed that both the headline and core measures are trending above the Federal Reserve’s target, suggesting more rate hikes could be forthcoming.

US Headline Inflation Growth Best Since 2014

Further support for the Federal Reserve’s ambitious rate hike arrived from US consumer prices on Wednesday after both the headline and core annualized inflation figures continued to rise. Headline inflation printed at 2.10% versus 1.70% a month earlier with rising energy and rent costs spurring the greatest upside pressure in the figure with 5.40% and 3.60% growth respectively. Core inflation, which strips away the more volatile food and energy components climbed to 2.20% in December from 2.10% a month earlier, with the figure now exceeding the Federal Reserve’s target for 14-straight months.

With unemployment and inflation having reached the Fed’s thresholds, it will be easier to continue tightening monetary policy over the coming months if both trend at current levels. With the US dollar recovering after a recent selloff, gold briefly fell below $1200 per troy ounce before rebounding.

UK Unemployment Stays on Hold

Although the latest speech from UK Prime Minister Theresa May has added to the overall uncertainty for the forthcoming “Brexit” negotiations now that Parliament must vote on any final deal, the UK economy has remained strong from a fundamental perspective. For the three months ending in November, the jobless rate remained on hold at an 11-year low of 4.80% while wages showed a surprising pickup, with average hourly earnings including bonuses rising by 2.80% compared to expectations of a 2.60% climb.

Nevertheless, Brexit continues to cast a long shadow over the economy despite the positive trajectory in key economic metrics that could reduce the Bank of England’s capabilities to accommodate monetary policy further. Even with a more positive outlook for inflation and job creation, GBPUSD retreated on Wednesday, erasing half the prior session’s gains.

Bank of Canada Expresses Room for Further Rate Cuts

In a widely anticipated decision, the Bank of Canada opted to leave interest rates on hold at 0.50% during the latest monetary policy meeting while expressing room for further policy accommodation should it be needed. Though there are some positive developments that are creating a sense of optimism including trade figures indicating the country reaching a surplus for the first time since September of 2014, there remains significant spare capacity. According to the Central Bank’s statement, slack in the labor market presents a problematic development while inflation trends short of the 2.00% target.

Comments from Governor Stephen Poloz also highlighted the potential for the Bank of Canada to reduce rates from current levels should downside risks materialize over the coming months. The more dovish outlook catalyzed a steep selloff in the Loonie, sending USDCAD over 200 pips higher from intraday lows.

Australian Unemployment Hits 6-Month High

Conditions in the Australian economy continue to deteriorate after the surprising -0.25% contraction in economic activity during the third quarter. Overnight, a report from the Australian Bureau of Statistics showed that the unemployment rate reached 5.80% in December, marking the highest point since June as more eligible workers seek work opportunities. After a rocky year, the latest figures suggest that slack in the labor market remains intact.

Adding to the challenges facing the Australian growth trajectory are forecasts which show inflation rising well beyond the 2.00-3.00% targeted by Central Bank as the rebound in commodities stokes higher consumer price gains. Should inflation continue to climb, it could force policy tightening or prevent additional accommodation from being added. Although weaker on Wednesday amid the US dollar rebound, the AUDUSD managed to mount a recovery overnight.