FXStreet (Guatemala) – Rob Carnell, analyst at ING Bank explained that the US CPI for July was fractionally softer than the market had expected.
Key Quotes:
“With the headline index rising 0.1%mom instead of the 0.2% anticipated, though the YoY rate remained at 0.2%, as expected – helped no doubt by some upwards rounding. The core index excluding energy and food rose only 0.1%mom, which leaves the YoY rate at 1.8%, and this, we feel, is the more important figure for the Federal Reserve, given the impact of volatile crude oil prices on the headline figures.
Although the Fed would want to see headline inflation nosing higher, the fact that it remains low can be shrugged off to crude oil’s ongoing declines. However, core inflation points to where the medium term inflation outlook should be headed, and this remains within a whisker of the Fed’s 2.0% target (admittedly the gap is a bit larger given the Fed’s preference for the PCE inflation measure, but that is nit-picking).
Scrolling through the data, there is a slightly larger decline in fuel prices than is suggested by the retail gasoline figures, but the good news here is that with the gasoline retailers slow to pass through any price falls in crude, this may have front-run some of the decline we may expect in coming months as retailers find they cannot ignore what is going on in the crude markets any more.
Otherwise, there were few standouts in this report. Rents rose a bit less than in previous months, though falling utilities have trimmed the heavily weighted housing figure to only 0.2%mom, which will have taken a sizable chunk out of the total figure. Second hand car and truck prices also continue to fall, perhaps reflecting the easy financing terms for new cars (raises questions about what these cars will be worth when owners come to trade them in in a few years’ time…but that is another story).
The coming months will be tougher for the headline index. Falling gasoline prices are likely to be a bigger feature of this report next month, and the only reason that the headline inflation rate may not fall, is the -0.1%mom reading from August 2014. Even so, there is definitely a big downside risk. Thereafter, without an imminent upturn in crude prices, headline inflation is likely to shift lower still.
For now, we think that the Fed still has the option to hike at their September meeting. But it is going to become harder for them to hike thereafter, and we have no further rate hikes pencilled in for the rest of 2015.”
(Market News Provided by FXstreet)