- Headline inflation expected to rise slightly, core stable
- Inflation third on Fed list behind growth, trade
- CPI result will not sway Fed policy
The Bureau of Labor Statistics, (BLS) will issue its consumer price index for July on Tuesday August 13th at 12:30 GMT, 8:30 EDT.
The consumer price index is expected to gain 0.3% in July after June’s 0.1% increase. Annual inflation will edge to 1.7% from 1.6% in June. Core CPI is forecast to slip to 0.2% in July from 0.3% in June. Core annual inflation is forecast to be unchanged at 2.1%.
Federal Reserve policy and inflation
When the FOMC lowered the fed funds rate for the first time in over a decade on July 31st inflation was not the first, or even the second thing on the governors’ minds. Chairman Powell made the order of preference quite clear: the US economic expansion, trade tensions with China, the global slowdown and then inflation, or inflation expectations. That doesn’t mean that higher inflation ‘symmetric around 2%’ as the Fed likes to say, wouldn’t be welcomed and that lower interest rates wouldn't be the traditional policy application.
This order of concern is not new. For most of the three year period from December 2015 until December 2018 as the FOMC was bringing the fed funds rate from 0.25% up to 2.5% inflation was below the 2% goal.
Then as now the Fed had a more important goal. Under Janet Yellen the Fed was determined to normalize interest rates at the fastest pace the economy could bear. The bank was successful. The Fed’s 2.5% achievement can only be envied by the industrial world’s other central banks who are now facing the same economic circumstances with far less in the way of available interest rate stimulus.
Federal Reserve Mandates
Mr. Powell’s primary goal and we assume of the FOMC as a whole is to keep the US expansion, currently the longest on record, running and delivering employment and wage gains to the far reaches of the economy. That is a goal wholly commensurate with the Fed’s ‘maximum employment’ Congressional mandate.
The Fed’s second mandate, ‘price stability’ was formulated in an era where rampant inflation was the chief economic threat. The success of central banks around the world in controlling debilitating inflation has made the price based mandate much less important.
It is one thing to bring uncontrolled consumer price inflation from 12%, where it is a severe danger to growth, employment and the reasonable functioning of an economy, down to 2% as the Fed has accomplished. It is another to push price changes 0.5% higher to meet a somewhat arbitrary 2% target. The first is basic first order economics; the second is minor technical adjustment.
CPI and PCE
The consumer price index has averaged 2.075% in the 12 months to June. The core rate averaged 2.15%. Both have been falling since peaking last July. The overall rate from 2.9% in July 2018, and the core rate from 2.4% that same month.
These declines are the same at a differential as the core PCE price index which has fallen from 2.1% last July to 1.6% in June.
Fed Inflation Policy
The consumer price index and the Fed’s preferred measure the core PCE index have become secondary concerns for the bank’s governors as they oversee the US economy.
Inflation has ceased to be the threat that it was in the heroic days of Paul Volker and Ronald Reagan. Whether the core PCE price index is at 1.6% or 2% or 2.2%, the impact of prices and the difference between those rates on the economy is close to nil.
If CPI and by implication PCE are lower than anticipated that offers mild reinforcement for the Fed’s July cut and perhaps future reductions. If they are higher that is pleasant, but unimportant.
Either way the Fed has not tied its rate policy to inflation. Sustaining the US expansion, mitigating as best it can the trade and global threats to growth and the American labor market are the governors’ priorities and the fount of their rate policy. Inflation is window dressing.
The core PCE index for July will be released on August 30th.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Follow us on Telegram
Stay updated of all the news
EUR/USD stays below 1.0900 as Q1 comes to an end
EUR/USD has lost its traction and declined below 1.0900 in the American session on Friday. Quarter-end flows seem to be allowing the US Dollar find some demand but the risk-positive market environment seems to be limiting the pair's downside ahead of the weekend.
GBP/USD trades below 1.2400, looks to post weekly gains
GBP/USD has edged lower after having tested 1.2400 earlier in the day but remains on track to end the third straight week in positive territory. The upbeat mood remains intact after soft PCE inflation data from the US, making it difficult for the US Dollar to continue to gather strength.
Gold tries to stabilize near $1,980 following earlier spike
Gold price has returned to the $1,980 area following a spike above $1,987 with the initial reaction to lower-than-expected PCE inflation figures from the US. Meanwhile, the benchmark 10-year US Treasury bond yield stays in the red near 3.5%, providing support to XAU/USD.
Will Dogecoin price pull an XRP and rally 60% next week?
Dogecoin price has been in a tight range bound movement since November 22. The recent recovery above the range low looks promising and hints at an explosive move for next week.
Week ahead – Nonfarm payrolls to set the tone for US dollar
With the banking turmoil receding, market participants will turn their attention back to economic releases. The spotlight will fall on the US employment report.