US Inflation Preview: Core CPI set to accelerate, keeping the USD bid

  • US Core Inflation is expected to recover after a blip in August.
  • Fed expectations for a hike in December are set to strengthen.
  • Barring a second consecutive disappointment, the USD will likely remain bid.

The US publishes its Consumer Price Index report for September on Thursday, October 11th, at 12:30 GMT. The Fed has two mandates: employment and price stability. The CPI report provides a fresh update on inflation, thus impacting the Fed and the US Dollar.

Expectations: Showing that the slowdown was a one-off

The job market continues creating jobs at a healthy pace while core inflation is well-anchored around the 2% target. The Fed cares about core prices: the changes that do include energy and food, which are quite volatile. Will we see signs of inflationary pressure now?

The Fed target the Core PCE which stood at 2% YoY in August. The Core CPI had a different methodology and stood at 2.2% in August. We will now get the fresh Core CPI for September. 

Back in August, core inflation decelerated to 2.2% from a cycle high of 2.4% in July. This time, an increase to 2.3% YoY is on the cards. Month over month, an increase of 0.2% is projected after 0.1% in August. All in all, expectations are for a return to normality, data that will show that August was a one-off and that price development is not slowing down.

Headline inflation carries expectations for a rise of 2.8% YoY after 2.7% beforehand, and 0.2% MoM, a repeat of last month's increase.

Potential USD reaction

The US Dollar enjoys the back wind of robust growth in the US economy, a hawkish Federal Reserve and high bond-yields. Also, the trade war that Trump is waging with China props up the greenback which receives demand as a safe haven currency.

Therefore, if the data meets expectations, the greenback could move up. An OK figure is more than good enough. According to bond markets, there is a 3 in 4 chance for a rate hike in December, the fourth one in 2018. An OK number will be good enough for the greenback.

Any acceleration will likely give the greenback a more significant boost, especially if the cycle high of 2.4% YoY is broken. That may not only strength expectations for December but also push the projections for 2019 a bit higher.

If Core CPI remains stuck at 2.2%, it would be a disappointment but not a disaster. The US Dollar will likely drop in the immediate aftermath but probably recover. It does not fundamentally change the picture. 

A drop to 2.1% would already mean a second consecutive month of decelerating inflation, and that would serve as a warning sign. Expectations for a rate increase in December will likely remain high, above 50% but the greenback may suffer a more meaningful drop. 

Conclusion

The US CPI report is a top-tier publication and critical for the Fed's rate decision. A small acceleration is on the cards, and it would show that August's dip was a one-off. The US Dollar is well-positioned into the event, and only a significant miss could inflict severe damage to the current uptrend. 

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.