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USD: The case of pickup of underlying inflation - MUFG

FXStreet (Delhi) – Derek Halpenny, Research Analyst at MUFG, notes that the dollar has advanced versus most currencies in response to the inflation data from the US yesterday that certainly made the case for the fed delaying until 2016 a little less compelling.

Key Quotes

“In fact it is pretty staggering to think that the FOMC’s main concern at present appears to be inflation being too low and not rising to its target over the medium term. There is certainly a lot more confidence about the employment part of the Fed’s mandate than there is about the inflation part. But the data yesterday really should allay the fears of FOMC members about inflation being too low.”

“The core annual CPI rate now stands at 1.9%, basically at the desired level for the FOMC. Yes, the mandated inflation measure is the core PCE price index and that is currently at 1.3% as of August. Crucially though all the evidence of underlying inflation is pointing to a gentle drift higher in inflation and not a decline.”

“The CPI data revealed that services inflation, excluding energy, jumped to 2.7% in September, matching the high of May 2014, which is the highest level since December 2008. That measure has accelerated on an annual basis for four consecutive months.”

“The Cleveland Fed trimmed mean annual CPI rate, which I highlighted here yesterday, also moved higher to 1.8%, the highest level since November last year and that rate has jumped in three of the last four months.”

“While the gap between these measures and the core PCE price index may persist, it is clear that underlying inflation pressures are at worst stable and in all likelihood are drifting higher. It is increasingly difficult to comprehend the Fed’s concerns when data like yesterday’s CPI report is released.”

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