Dollar Fortunes Hinge on Inflation

Market Trends - 21/01/2016

The latest figures on US inflation metrics were released yesterday with the consumer price index underscoring the mixed outlook for the economy and monetary policy.  Although the annualized headline and core figures give a better impression for how inflation is evolving over time, it contrasts sharply with the monthly report which is slightly more volatile and sensitive to rapidly changing conditions.  The most recent headline monthly CPI figure fell by -0.10%, highlighting the near-term realities as energy prices continued to drag the figure lower.  However, when compared to the annualized headline figure, the difference is obvious.  The year over year pace of CPI increase climbed to 0.70% in the latest reading, reflecting a strong improvement and marking the highest level since January of 2015.  Moreover, the core figure which strips out the more unstable components inherent in inflation readings, climbed to 2.10% in a stunning turn of events for policymakers fearing the growing threat of disinflation and deflation across advanced economies.

While the initial decision by the Federal Reserve to hike rates was widely derided as too late to have a lasting impact with expectations that the policy shift would quickly be reversed, the latest readings seem to confirm that inflation expectations are more firmly anchored.  Despite the possibility that energy prices will fall further over the medium-term, especially in light of the most recent grim predictions from the International Energy Agency, conditions appear to be moving back towards the Fed’s mandate of achieving 2.00% over the long-term.  While not necessarily assured that consumer prices will continue to appreciate over the coming months, the current trend is showing strong improvement, paving the way for additional hikes in each of the upcoming quarters of 2016.  However, in the near-term, this data should be taken as a sign that the US dollar is set to appreciate further with conditions in certain areas of the economy showing vast improvements.


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