Of all the macroeconomic trends that the world has faced since the beginning of the COVID-19 pandemic, inflation has perhaps been one of the greatest causes for concern. Central Banks from Japan to the United States have struggled to adapt their monetary policies to the tidal wave of rising prices. Recent times have seen central banks like the Federal Reserve adopt hawkish monetary policies in response to inflation; November 14th’s American Consumer Price Index data release could shed some light on whether the Federal Reserve will continue raising interest rates.
What Is CPI
The CPI is the most widely used tool to measure inflation, or its inverse, deflation. This important tool is used to calculate how the price of a wide range of market goods shifts over time.
The Dollar (DX)’s relative purchasing power can also be estimated indirectly with the CPI, by seeing whether an amount of goods can be purchased with more or less money compared to the previously-measured period. The prices of over 90,000 goods are monitored by the Bureau of Labor Statistics every month; when inflation rates are quoted in the media, it is important to understand whether the periods of comparison are months, quarters, or years, in order to accurately understand the time range of price increases.
However, some raise the concern that the CPI has drawbacks as a measure of the U.S. economy’s health, as it fails to account for the diversity of consumption patterns adopted by American consumers, and may even underestimate inflation. Despite these potential disadvantages, it’s still preferred by professional economists and policymakers alike to judge whether inflation is within the ‘ideal’ two- to three-percent range.
Ahead of Tuesday’s CPI Release
The report's release, scheduled for Tuesday, November 14th at 8:30 a.m. ET is anticipated to reveal a headline inflation of 3.3%, which would represent a significant slowdown from the 3.7% year-over-year jump registered in September. The month-over-month increase in consumer prices is expected to be 0.1%, slower than September's 0.4%.
The expected moderation in headline figures is attributed to lower energy costs, with Bank of America (BAC) projecting a 1.8% month-over-month drop in energy prices, driven by lower Oil (CL) prices in October. Food inflation is predicted to continue at a pace of 0.2% month over month.
Despite the deceleration in headline inflation, on a "core" basis, which excludes volatile costs like food and Gasoline (RB), October's prices are expected to have risen by 4.1% year-over-year, matching the increase seen in September. Monthly core prices are also expected to have climbed 0.3%, in line with September's rise.
Wells Fargo (WFC) anticipates a subdued increase in October's headline CPI, but suggests that another firm reading in the core may overshadow it. The bank notes that core CPI is likely to indicate slower progress on inflation, with shelter disinflation potentially resuming in October, but health insurance costs contributing positively. Goods deflation is expected to have paused.
Despite the anticipation of slower inflation in the coming months, Wells Fargo's team cautions that it doesn't necessarily mean victory on inflation. They expect core CPI to continue rising by about 3% annually by the same time next year.
Inflation has remained above the Federal Reserve's 2% target, but recent comments from Fed Chair Jerome Powell have been indicating a cautious approach. Powell stated that slowing down allows a better assessment of the need for further actions to address inflation. Accordingly, an interest rate hike at the Federal Open Market Committee's (FOMC) December 12-13th summit is seen by many as unlikely. (Source: Yahoo Finance)
How Did Markets Open the Week?
Over the course of the first trading day of the week, trends among major New York Indices were mixed. Yesterday, the S&P 500 (USA 500) and the Nasdaq (US-TECH 100) dropped by just under 0.1% and 0.2% respectively, while the Dow Jones Industrial Average (USA 30) had risen almost 0.2% by the ring of the closing bell. What these trends bode for today’s results in the wake of the latest CPI data remains to be seen.
All in all, conflicting predictions regarding the outcome of Wednesday’s CPI release leave little for traders to do but await the final verdict. Markets will have to wait and see how the latest macroeconomic trends play out.