US Core inflation going wrong way – BAML

FXStreet (Guatemala) – In respect of the FOMC this week, Analysts at Bank of america Merrill Lynch explained that Fed officials are likely to once again dismiss variously disinflationary forces, like the strong USD, as “transitory” in June.

Key Quotes:

“In our view, there is a sizable risk the Fed is underestimating the size and persistence of the inflation gap. The only inflation measure that has shown any recent upside has been core CPI, which continues to diverge from the Fed’s preferred core PCE measure.”

“Core PPI (excluding volatile trade services) and import prices of consumer goods fell in May. Earlier in the year, Yellen said inflation need not rise to start the hiking cycle, it just cannot fall.”

“When she spoke, core PCE inflation was 1.4%; the most recent reading is 1.2%. This may be a temporary dip, but the inflation outlook remains the biggest risk for plans to hike in September. It is not clear the FOMC will be able to tick this box by then. It cannot do so today.”

“For inflation, we do not expect any significant changes to the projections. The FOMC could add a tenth or two to 2015 headline inflation in light of the rise in oil prices since the March SEP, but that would have no material impact on policy.”

“Conversely, a few doves might reduce their near-term core inflation forecasts, so there is a small chance the lower bound of the central tendency edges down. Much more important with be Yellen’s comments on the inflation outlook: our base case is that she reiterates the view low inflation is transitory and a stronger labor market will pull up inflation, which leaves September as a live option.”

“More caution around the inflation outlook would be notable, and likely would be seized upon by markets as a signal that Fed rate hikes may come later. More generally, Yellen’s tone will be important: if she sounds like the Fed is still looking to justify a rate hike, then September may be less likely. But if she suggests the FOMC needs data to dissuade them from hiking, then September would remain the base case for liftoff.”

Analysts at Bank of america Merrill Lynch explained that Fed officials are likely to once again dismiss variously disinflationary forces, like the strong USD, as “transitory” in June.

(Market News Provided by FXstreet)