US: Higher inflation profile is anticipated - Scotiabank

In view of analysts at Scotiabank, US inflation is probably undergoing transitory headwinds related to past USD strength.

Key Quotes

“As the USD has weakened since spring, a higher inflation profile is anticipated and this should support a return to policy tightening. While the connection between the dollar and inflation is hardly air-tight, large, abrupt swings in the dollar tend to be more correlated with large, abrupt swings in import prices and modest pass-through to CPI. The broad dollar index is now at its lowest since April 2016 and has reversed all of the pre- and post-election rally and then some. A more muted correction in the dollar in early 2016 was followed by a rise in core PCE inflation from about 1.2% y/y to 1.9% y/y with several drivers, the USD among them.” 

“It is important to recall the literature and to note that the Federal Reserve views the currency’s role in this way. Indeed the speech about two years ago by retiring Vice Chairman Stanley Fischer was specifically on the very topic of exchange rate effects on growth and inflation. Fischer stated that Fed models indicate that for every 10% trade weighted appreciation in the dollar, core PCE inflation is reduced by 0.5% in the two quarters following the dollar’s move and the four-quarter effect is to reduce core PCE inflation by about 0.3%. Note that the broad dollar index appreciated by about 9% from the spring of 2016 until early 2017 and has since depreciated by a similar amount.” 

“It is therefore conceivable that much of the deceleration in core PCE inflation from 1.9% at the start of this year to 1.4% as of August was due to the dollar’s prior appreciation. By corollary, dollar depreciation since earlier this year may well have the Fed much closer to its inflation target as soon as 2018H1.”

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.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD rebounds after dismal US PMIs

EUR/USD is trading closer to 1.0850, rising in response to weak US PMIs, with the services one pointing to contraction. Earlier, German Manufacturing PMI beat estimates. 


GBP/USD advances to 1.2950 after US data

GBP/USD is trading around 1.2950, taking advantage of US weakness stemming from a downfall in Markit's Services PMI in the US. In Britain, the Manufacturing PMI exceeded estimates. 


Top 3 Price Prediction Bitcoin, Ethereum, Ripple: Consolidation process underway

The Crypto board continues to be immersed in an emotional leg-breaking, consistently punishing the emotional state of the traders with its continuous changes of direction.

Read more

XAU/USD unstoppable, breaks to fresh 2020 highs, approaching $1650/oz

XAU/USD is trading in an uptrend above its main daily simple moving averages (SMAs) while breaking above a bull channel. Gold is printing fresh 2020 highs hitting $1646.64 per ounce on an intraday basis.  

Gold News

FXStreet launches Real-Time Trading Signals

FXStreet Signals offers access to explanatory live webinars, real-time notifications when signals are triggered and exclusive membership to the company’s Telegram group, where users get direct guidance by our analysts and get room to discuss and interact.

More info