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CPI Rise Reinforces Fed Hike Forecast

Don Curren June 12, 2018

May consumer price index data in the US came in close to expectations Tuesday, supporting market expectations the Fed will hike rates again on Wednesday – but not providing any new impetus for the US dollar.

The US Bureau of Labor Statistics reported that the all-items CPI rose 0.2% in May on a seasonally adjusted basis after rising by the same amount in April.

Over the last 12 months, the all items index rose 2.8%, higher than the expected 2.7% and the 2.5% reading in April. The annual gain was the largest since February 2012.

Economists had expected the all-items CPI to climb by 0.2% on a monthly basis in May.

The BLS said the indexes for gasoline and shelter were the largest factors in the increase in the all items index. The gasoline index rose 1.7%, more than offsetting declines in some of the other energy sub-indexes and led to a 0.9% rise in the energy index.

The core index, which excludes food and energy rose 0.2% in May. The shelter index rose 0.3 percent in May. The indexes for new vehicles, education and communication, and tobacco increased, while the indexes for household furnishing and operations, and used cars and trucks fell.

The US dollar index basically didn’t budge in response to the data, likely reflecting the market’s single-minded focus on the Fed’s policy announcement on Wednesday – and the fact the data were entirely compatible with expectations the US central bank will its increase its target range for the federal funds rate to 1.75% to 2.0% at its fourth policy statement of the year.

As of Monday afternoon, US futures markets were pricing in a roughly 96% probability of another rate increase from the Fed when the Federal Open Market Committee meeting ends at 2 pm EDT Wednesday.

The greenback’s lack of response to the inflation data may also indicate a greater than usual focus on geopolitical developments in recent sessions, including US President Donald Trump’s summit meeting with North Korean dictator Kim Jong Un and Trump’s vocal criticism of Canadian Prime Minister Justin Trudeau.

The Fed’s preferred metric for inflation is the monthly the change in the core personal consumption expenditures price index (PCE), but any reading of the state of consumer inflation in important at the current juncture, as it’s the level and durability of upward pressures on prices that will determine the longevity of the Fed’s monetary tightening program.

Bottom Line: A six-year high in all-items annual inflation recorded in May and a strong report overall will cement expectations the Fed will raise rates on Wednesday, but was close enough to expectations that it didn’t motivate much movement in the US dollar.

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