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US Preview: CPI seen stagnating in December for second month in row

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 20, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - US CPI data will be released today at 13.30 GMT. The data will likely reflect the negative impact of oil slump and strong dollar on prices. Month on month, CPI is expected to have stagnated in December, unchanged from November’s reading. Inflation however is expected to have risen 0.8 per cent year on year in December, up from the 0.5 per cent reading seen in November. The core CPI excluding food and energy costs is likely to increase to 2.1 per cent year on year, marking the fastest pace of rise since July 2012.

    Factors which weigh on prices

    Collapse in oil prices made fuel cheaper for Americans. The US consumer price basket is being pulled in opposite directions. Strong dollar on the other hand lowered the prices of goods like appliances, toys, tools or clothing which are shipped to the US after being produced elsewhere. The value of goods produced overseas fell the moment they were converted to dollar. This factor forced US manufacturers to lower prices of goods as they struggled to stay competitive when pitted against foreign rivals. Raw materials which have become less expensive also hurt prices of finished goods.

    The wages in the US has not grown as expected though the labour market is seen strengthening steadily over the last year. Moreover, spending cuts reduced revenues of companies forcing them to lay off workers. Thus, people have less disposable income which curbs their spending power. More discounts were needed to lure customers. These factors have led economists to conclude that inflation has stagnated in December for the second straight month.

    What is the basis of YoY increase estimate?

    Economists believe it is the favorable basis of comparison which has yielded year on year increase in CPI. The CPI was seen falling in the latter half of 2014, marking the biggest drop since the recession in December 2014. Thus, even a small rise in price seen in 2015 looks gigantic in comparison to the record low of 2014.

    Also, the extended low prices period has likely caused consumers to re-adjust their consumption needs. They probably now choose to wait for big discounts to buy non-essential items. People have now started expecting lower prices which New York Fed President William Dudley feels is more concerning because it would be difficult to push inflation up if once it becomes “unanchored to the downside”.

    FOMC aware of uncertainty in inflation outlook

    The minutes of Fed’s December meeting highlighted that FOMC members during the meeting had flagged the risks related to achieving inflation target. The minutes acknowledged the “uncertainty and risks present in the inflation outlook,” the minutes said. The FOMC also felt the need to closely assess the progress of inflation to ensure inflation was rising in the expected manner. ‘In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal’, the minutes stated.

    Given that oil is expected to fall further in the coming months as Iran starts exporting oil, inflation cannot be expected to move up. Fed President Bullard stressed that fall in inflation expectations measures "is becoming worrisome".

    The Fed, post raising rates for the first time in a decade had stated that the subsequent hikes will be gradual and data dependent. While considering rate hikes the Fed is guided by two major indicators- inflation growth and unemployment rate. The labor market has shown considerable progress though the wage growth has remained below expectation. Inflation on the other hand continues to worry policy makers. Given the current price scenario it looks difficult for the Fed to achieve four rate hikes this year. Traders in futures markets see the Fed raising rates just twice by year-end, to just under 1 per cent.
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