US inflation increases ahead of Fed meeting

Even though the release of recent weak economic data persuaded investors not to expect an interest rate increase by the Fed, there was a surprise increase in consumer prices during last month.

The report released by the US Bureau of Labour Statistics on Friday showed that the Consumer Price Index (CPI) for August increased by 0.2% and surprised analysts who were expecting an increase by 0.1% only, while the rate for July was 0%. The similarly popular core CPI ex Food and Energy showed an increase in August by 0.3% while the rate for July was 0.2%. This is the largest rise of the last six months and it is the result of the medical sector’s increase of costs by a surprising 1%, and also the rise of rent levels by 0.3%.

Some traders are still with the view that the Fed will remain prudent and so it will refrain from increasing interest rates until their December meeting, although some of the Federal Open Market Committee’s (FOMC) members will have more reasons to justify their view for a rate hike sooner than later. In all fairness, the Fed was estimating to increase interest rates several times during the current year but market uncertainty boosted by UK’s decision to exit the EU, combined with discouraging economic data, provided limited arguments to do so.

A number of economic data released on Thursday reinforced the perception that the Fed is likely to hold off from adjusting interest rates. Retail sales for August decreased by 0.3%, continuing jobless claims for the week ending 02 September increased by 2.143 million, while industrial production for August also decreased by 0.4% compared to July’s 0.6% increase.

The Fed’s two core objectives are to decrease unemployment levels and to adjust inflation. The labour market has improved significantly, however inflation levels until now have failed to increase. And this is what drives some of the FOMC members to refrain from supporting an increase of interest rates.

The EUR/USD moved with a noteworthy decrease by 0.8% on Friday following the CPI data release and fell to 1.11566 for the first time in the last ten days. The popular currency pair erased all mild gains from the previous trading sessions as on a weekly basis it had a decrease of 0.7%.

The US stock markets ended Friday’s trading session lower, however on a weekly basis they posted gains. Traders noted the better-than-expected inflation data and continued speculating on the upcoming FOMC meeting and interest rate decision, expected on Wednesday 21 September at 18:00 GMT. Both the Dow Jones Industrial Average and the S&P 500 on Friday fell marginally but their weekly trading sessions ended upwards by 0.2% and 0.6% respectively. Last week’s data don’t seem to give any clear direction as regards to the eagerly awaited Fed meeting, but is it enough of an indication to make an informed decision ahead of it?

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