Global Daily – US inflation and the Fed

by: Maritza Cabezas

Global-Daily-Insight-18-November.pdf (61 KB)
  • Rising energy and core prices push up US inflation…
  • …providing some comfort to the Fed to hike rates in December
  • Germany’s ZEW shows mood among investors improving








Rising energy and core prices push up US headline inflation…

US headline inflation increased 0.2% mom in October, following a decline of 0.2% the previous month. This is the first rise in two months. Core CPI (ex. energy and food) increased 0.2% mom, unchanged from the previous month. On a year-on-year basis, total CPI increased 0.2% and core CPI rose 1.9%. Core CPI has been holding up well as a result of a continued increase in service prices (0.3% mom). Shelter (rents) remains the main driver, but other categories, including medical care, personal care, airline fares and recreation also rose, suggesting more broad-based strength in core inflation. This is likely the result of higher disposable income and lower energy prices. The rise in service prices has been offsetting the decline in goods prices. The latter has been falling as a result of lower transportation costs and a strong dollar which makes imported goods less expensive.


…providing some comfort to the Fed to hike rates in December

The Fed is looking to see inflation picking up, before it raises rates. Tuesday’s report will provide some confidence to Fed officials to hike rates in December. The Fed’s preferred measure of inflation is, however, the Core Personal Consumption Expenditure Price Index. This measure is running below the core CPI at 1.3% yoy in September, but we expect that stronger domestic demand, mainly driven by consumption, will give core PCE the necessary impulse in time. The problem is that there is only one month before the next FOMC meeting. This means that stronger wage growth in the November job report, for instance, would help the Fed in its decision to hike in December. Other indicators, including inflation expectations should also support the Fed’s view of a rate hike in December.


Mood among German investors improves

The ZEW indicator of economic sentiment in Germany increased in November to 10.4 from 1.9 the previous month. This was the first increase in eight months, but is still below the long-term average of 24.8. We expect Germany’s economic outlook to remain benign. The Germany economy slowed slightly in the third quarter, according to GDP growth data published a few days ago. The details of the GDP components will be confirmed later this month. Other incoming data reported so far shows that domestic demand remains resilient. We expect consumption to continue to drive growth, supported by a solid labour market and sustained wage increases. This should help offset the weakness in foreign trade resulting from the slowdown in emerging markets. A weaker currency is also reducing this impact, while additional stimulus from the ECB in December is likely to continue to support a weaker euro and benefit exports.