Inflation Pickup Sends Dollar Higher

Market Trends - 15/10/2015

The latest consumer price inflation numbers released just moments ago showed that the dis-inflationary trend might finally be reversing in the United States after the headline number fell less than expected and the core figure experienced a surprising pickup. While consumer spending figures released in the prior session might have highlighted the reluctance of Americans to spend in the current economic environment, the latest numbers might signal the rebound that Federal Reserve policymakers have so desperately sought. Although today’s data is likely to have only a limited impact on the outlook for interest rates, this is the one remaining components that remains elusive when it comes to the Federal Reserve fulfilling its mandate. The maximum employment mandate continues to give the green light for interest rate liftoff with the latest initial jobless claims figure printing at the at the lowest level since 1973 in another triumph for the Central Bank. This figure is going to be cheered in spite of the differing reality evidenced by tumbling labor force participation.

After a tremendous rally, precious metals prices are beginning to experience a pullback following the rebound in the US dollar. Even though this might not necessarily improve the odds of a 2015 rate hike, today’s data has little impact on the Federal Reserve’s decision-making process, with the Central Bank preferring PCE as a benchmark for evaluating inflation. The latest data might be cheered on by market participants as “less negative” but the reality when looking at the numbers becomes increasingly apparent. The CPI number is positive once stripping out food and energy costs, two vital components that are more volatile than other constituents for the measure. Should seasonal energy demand decrease past a certain point, the current supply and demand imbalance present in crude oil could give way to further losses in commodities and additional deflationary pressures. The derailment of any shift in monetary policy is already underway and even though the latest numbers present an optimistic narrative, the underlying truth is very different from what is portrayed by the data.


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