On Thursday at 1:30 pm GMT the U.S. will print its consumer price increases for the month of January.
Will the numbers cause the Fed to step up its tapering timeline? Or will they cause more selling for the dollar?
Here are major points you need to know about the release:
What the heck is a CPI report?
The consumer price index (CPI) report reflects the monthly change in the prices of goods and services purchased by consumers. The U.S. also publishes a “core” version, which removes volatile items such as food and energy prices.
Traders look at CPI because stabilizing prices is one of the Fed’s main #CentralBankGoals. That means it can change its policies if there are any significant trends that might affect economic growth.
What happened last time?
- Headline CPI (m/m): 0.5% vs. 0.4% expected, 0.8% in November
- Core CPI (m/m): 0.6% vs. 0.5% expected and previous
- Headline CPI (y/y): 7.0% as expected vs. 6.8% in November
- Core CPI (y/y): 5.5% vs. 5.4% expected, 4.9% previous
Keep in mind that Fed Governor Powell had just taken center stage earlier that week and shared that the Fed would do whatever is necessary to contain inflation including tapering at a faster pace and raising interest rates.
Traders who had priced in an aggressive Fed schedule found it easy to break USD from its tight intraday ranges and take profits when the not-so-surprising inflation numbers were released.
What are traders expecting this time?
- Headline CPI (m/m): 0.3% vs. 0.5% previous
- Core CPI (m/m): steady at 0.6%
- Headline CPI (y/y): 7.1% vs. 7.0% previous
- Core CPI (y/y): 5.7% vs. 5.5% previous
Analysts see prices rising by 7.1% from a year ago in January as capacity constraints in both the goods and services industries continue to push prices higher.
Monthly inflation, on the other hand, is expected to have slowed down from 0.5% while core inflation maintains its 0.6% growth.Markit noted that price pressures eased for both manufacturers and service providers even as “output charge inflation” remains unchanged from December. Meanwhile, ISM shared that price increased at a faster rate for manufacturers and increased at a slower rate for service organizations.
So, it looks like both goods and services providers still paid higher input prices in January even though the increase wasn’t as high for some firms.
Think it translated to lower price increases for consumers?
Last Friday’s strong labor numbers all but sealed the deal for a March rate hike. If this week’s report shows that the Fed will have a higher hill to climb to combat high inflation, then we could see USD trade higher in anticipation of a more hawkish Fed schedule.
A weaker than expected inflation rate, on the other hand, would support expectations of inflation possibly peaking.
If the Fed won’t have to step up more than the members have already hinted, then traders might find it easier to dump the dollar in favor of riskier bets.