US Inflation Data Surges on Oil Prices

US Inflation Data Surges on Oil Prices
by, David Frank, Economist, Bullish University

Points to consider in this Forex article:

• September’s headline consumer price index (CPI) for the United States just matched high expectations
• Officials at the Federal Reserve Board (FRB) have been openly debating the pros and cons of higher inflation in the United States.
• US Dollar gains against the euro as the EUR/USD Forex market moves lower.

The United States just released key inflation data for the month of September with the headline print of the consumer price index or CPI. The CPI matched high expectations of an annual increase of 1.5 percent. This is beat last month’s print of 1.1 percent. The high expected level of 1.5 percent was matched. The core CPI, which does not include food or energy prices, expanded by 2.2 percent compared to the expected 2.3 percent growth. This number grew by 2.3 percent in August. This unexpected growth in the headline inflation number was driven primarily by the rise in crude oil. The price of US WTI Crude rose by 2.9 percent last month. The largest drag was from apparel prices. Seasonal sales and discounting is starting up now. This caused the price of apparel to contract by 0.7 percent.

This consumer price index report comes at a very divisive time for the United States Federal Reserve (Fed). Several Fed bank presidents have openly called on the Federal Reserve, through its monetary policy board called the Federal Open Markets Committee (FOMC) to raise the headline interest rate. These Fed officials are citing a tightening in the labor markets and a looming breakout of inflation. On the other hand, Federal Reserve Chair Janet Yellen, who just spoke at the Boston Fed conference, struck a more dovish tone towards the Fed’s upcoming monetary policy. She talked about the weakening belief in the Phillips Curve, in other words a tightening labor market could lead to more inflation. She mentioned that the best way to recover from a Great Recession is to allow the economy and inflation to overheat.

The Federal Reserve, through the FOMC, is scheduled to meet again in November to decide on monetary policy and interest rates. It is not very likely they will pull the trigger and raise rates so soon. It is more likely they will raise rates by 25 basis points in December.

There was a couple of other pieces of data just released that is supporting the US Dollar today. The consumer price index (core) rose 2.2 percent versus the expected 2.3 percent and the real average weekly earnings (August) expanded by 0.8 percent versus the expected 0.4 percent expected. This is an annual number.

Inflation Data Supports the US Dollar against the Euro

[MT 4 Chart]

Let’s take a quick look at today’s EUR/USD daily technical analysis. Please refer to the above 15 minute MT chart. After the CPI data was released, the euro fell sharply against the United States Dollar. The pair fell from the pivot near 1.1035 to 1.0947. At the time of this report, the euro was trading above the key technical support level of 1.10 at 1.1005. A daily close below this downside barrier, at 1.10, challenges the 1.0950 at first.

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