Headline inflation gained the most in eight months in September with the CPI up 0.5% m/m and 2.2% y/y in September due to higher gasoline prices from the effects of hurricane-related production disruptions at oil refineries in the Gulf Coast area. Core CPI remain muted at 1.7% y/y for the fifth consecutive month. We believe with inflation data failing to meet expectations and core inflation in persistent modest, readings, it could raise some concerns among the Fed’s officials. This explains the drop in the USD after the CPI figures were announced.

What is weighing the USD is the softer core inflation data with the headline CPI distorted by the effect of the hurricanes that hit in September. The new data suggests that the dovish Fed members may find fresh support for arguments to take a go-it-slow approach to rate increases. More so if we are continuously being presented with unexciting data over the next weeks. Then there will be more downside risk.

Still, a rate increase by the Fed is appeared baked in December as the Fed officials remain convinced that inflation will move higher in the next six months due to the tight labour market and the bounce back in September’s retail sales to a 2-1/2 years gain i.e. 1.6%.

• Headline inflation gained the most in eight months in September. The Consumer Price Index (CPI) jumped 0.5% m/m in September from 0.4% m/m in August while y/y, it increased 2.2% y/y, the biggest since January from 1.9% y/y in August but fell below our and consensus expectations of 2.4% y/y and 2.3% y/y respectively.

• The gains were due to higher gasoline prices from the effects of hurricane-related production disruptions at oil refineries in the Gulf Coast area. Meanwhile, the underlying inflation remain muted.

• Core inflation, which excludes the volatile food and energy components, gained 0.1% m/m in September from 0.2% m/m in August. On a y/y basis, the core CPI rose 1.7% y/y for the fifth consecutive month.

• We believe with inflation failing to meet expectation and core inflation in persistent modest readings, it could raise some concerns among the Fed’s officials. Even the Fed's preferred inflation measure — i.e. core personal consumption expenditures (PCE) price index that excludes food and energy — has consistently undershot the Fed’s 2% target for more than five years.

• This explains the drop in the USD after the CPI failed to meet expectations. What is weighing the USD is the softer core inflation data with headline CPI distorted by the effect of the hurricanes that hit in September.

• We feel the new data suggests that the dovish Fed members may find fresh support for arguments to take a go-it-slow approach to rate increases. More so if we are continuously being presented with unexciting data over the next weeks. Then there will be more downside risk.

• Still, a rate increase by the Fed is appeared baked in December. We believe the Fed officials are still convinced that inflation will move higher in the next six months due to the tight labour market with the unemployment rate at a nearly 17-year low of 4.2% and the bounce back in September’s retail sales to a 2-1/2 years gain i.e. 1.6%, which is driven by reconstruction and clean-up efforts in areas devastated by Hurricanes Harvey and Irma as these boosted demand for building materials and motor vehicles.

Source: AmInvest Research - 16 Oct 2017