Trading the US CPI Report

Given the rather lackluster list of US economic data scheduled for release tomorrow, it’s no wonder that a lot of attention will be placed on the consumer prices report for December. And, although expectations are for a relative stabilization of headline prices, the overall trend and core prices will additionally be scrutinized. Here’s what to expect.

Inflationary Pressures Subdued

Anticipated to be released at an annual increase of 2.2%, inflationary pressures are likely to be subdued once again in the final month of 2012. Incidentally, the second consecutive 2.2% print could spark some concern that rising prices may have finally established a bottom, and could potentially creep higher throughout 2013. Supportive evidence has been seen in the most recent ISM manufacturing activity report for the same month. Although new orders activity only grew to a reading of 50.3 – similar to November’s reading – the report’s inflationary conditions subindex showed an increase to 55.5 from 52.5. This means that respondents witnessed a definitive increase in monthly prices.

Subsequently, core prices – excluding food and fuel prices – is additionally anticipated to climb in the month. Estimates are for core prices to have climbed by 0.2% in the month over month change, while stabilizing at 1.9% annually.

Probable Outcomes

At or Above 2.2%. This is a likely scenario given the evidence seen in the recent manufacturing ISM report. Should this play out, however, it would be considered widely bearish for the US economy and the US dollar. If consumer prices continue to rise, and return to the 2.6% level seen back in September, the Federal Reserve will likely consider a pre-emptive end to current monetary stimulus.

Although pre-occupied with an economic recovery the last time this happened, Fed officials are more concerned over looming inflation and the inefficacy of current monetary stimulus. As a result, any signal that things may be heating up could bolster the case for an end to quantitative easing sooner rather than later.

Below 2.2%. The lower probability event out of the two scenarios, a below 2.2% consumer price report would spur notions of further continuation of current central bank policy. The notion could give the EUR and AUD a bit of a lift against the US dollar – given that debt ceiling drivers don’t continue to overshadow economic fundamentals.