US Inflation Climb Signals Room for Additional Dollar Appreciation

Market Trends - 18/01/2017

Although a lagging indicator, US consumer prices rose by a 2.10% annualized pace according to December readings, suggesting that inflation is trending above the Federal Reserve’s 2.00% target.

While it is too early to tell if that momentum will persist after the rate hike in the middle of last month, it does signal greater scope for the US Central Bank to raise rates over the medium-term.

Taken from another point of view, core inflation, which strips away the more volatile consumer price components such as energy and food costs, rose to 2.20% for the same annualized period, at or above the 2.00% threshold now for 14-straight months.  One of the key drivers that has gone largely unnoticed by the financial media is rising housing costs as rents continue to edge higher across the United States.

According to the latest figures from the Department of Labor, rent inflation rose by 4.00% year over year.

On the whole, this data should be largely interpreted as dollar-positive considering the Federal Reserve needs inflation to remain stable around 2.00% in order to continue raising interest rates gradually.  However, as several Fed Governors have most recently opined, the real question remains as to how fiscal stimulus promises will evolve over the coming months.

Generally speaking, fiscal stimulus results in deficit spending which in turn adds upside pressure on inflation.  Should inflation continue to climb from current levels, it could force the Federal Reserve to raise rates quicker than anticipated.  However, to truly know if the ongoing inflation trend is sustainable, the January numbers will need to first be analyzed to understand whether the last rate hike conducted in December impacted inflation growth.

While the US dollar has been under serious pressure from the outset of the year, sending gold to the highest price since November, this latest inflation print could spark a reversal in the dollar, pressuring precious metals back to the downside near-term.

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