Soft CPI Data Reduces Hawkish Sentiments Ahead of FOMC

By the close of last week’s trading, there had been great expectations that the US Federal reserve is going to take up a more hawkish stance towards its policies. The Jackson Hole symposium and the FOMC minutes are supposed to be released today, Wednesday August 17^th. However, there have been suggestions that a hawkish tone will only be sustained if the stock markets keep on performing as good as they have been and inflation remains controlled. These conditions are now highly in doubt after Tuesday’s CPI results were released. The market sentiment has quickly shifted against the hawkish pose.

CPI Data was softer than expected

The US CPI remained steady in July, almost reflecting the very downbeat expectations that had emerged late on Friday. The negative expectations stemmed from a weaker than anticipated PPI figure on Friday. That all meant that the USA experienced a dip in the rate of inflation as the annual rate dropped to 0.8 YoY (JUL) while the previous release was 1.0% in June. The core inflation also showed a 0.11pp lunge over the month with the annual rate printing at 2.2%YoY. Other components of the inflation report still showed weakness glaring around the economy as overall commodities fell 2.5%YoY and service prices remained weak. Consensus remains that the low services price is as a results of relaxed wage growth.

Less chances of a rate hike before September

Most of the earlier conditions that would have favored a rate hike being done as soon as September have been negated by the current events. There is less reason to have the rate hikes in September 2016. Even if a rate hike was to be carried out in 2016, it would be difficult to see that happen before December. That viewpoint remains even with good news from the labor market and “somewhat okay” spending trends. A more reasonable forecast is a rate hike in Q1 2017. Still, the people who remain hawkish at the moment have a good reason to do so because there are no guarantees that the soft CPI figures will stand.

Current inflation atmosphere will not remain

There are some viewpoints worth noting that suggest the current soft CPI results are not going to stay for a prolonged period. Once again, people have to factor in that the energy prices definitely dragged the headline CPI (JUL). Volatile components of the index include the used car prices, energy and airline fares. It is always good to not that low air fares usually alter sharply almost in perfect alternation from month to month. Airline fares had dropped by about 5% over the month of July. Core inflation has a high chance of trend continuation as long as the labor market continues to shrink and the wages keep on rising.