Inflation Is In The Eye Of The Beholder
Headline data releases elicit immediate market responses that generally reflect whether or not the economic numbers match or beat forecasts or whether they come in below expectations. The sell off in the US dollar and the paring back of Fed rate hike expectations following last Friday’s benign US CPI data is a case in point. But what immediate market responses do not necessarily reflect is how policymakers perceive the importance of those same data points. While Minneapolis Fed chief Neel Kashkari, who has consistently voted against this year’s Fed rate hikes, feels, as might be expected, that as US CPI again came in low “we have the luxury of waiting to see what actually happens… before we decide where to go with monetary policy,” others, who have voted with the majority, may think differently. Speaking ahead of Friday’s CPI data New York Fed chief and vice-chairman of the rate-setting Federal Reserve Open Market Committee (FOMC) William Dudley said “people think about inflation on a year-over-year basis, and those year-over-year measures are going to be depressed for a while.
But thinking about it sequentially, we would expect the inflation data to show a little bit more upward pressure than what we’ve seen over the last four months or so.” French bank Societe Generale therefore thinks that the FOMC “will continue to look for the 3-month and 6-month annualized rates to accelerate in the second half in order to justify a rate hike” and isn’t ruling out a US rate hike in December. If, as seems likely, Dudley’s views are a reasonable reflection of Fed chief Janet Yellen’s view of the world, markets may have to adopt a different approach to their interpretation of monthly US price inflation data in coming months.
Written by Neal Kimberley, External Currency Analyst.