The latest inflation data shows that the consumer price index (CPI) rose 0.4% from the previous, versus the analysts’ prediction of 0.3%. The CPI was also up 1.9% compared to the 1.7% at the same time last year. However, the core index, which removes volatile food and energy prices, was on target with predictions at a 0.2% increase.
The difference between the CPI and the core index was because of the impact of Harvey, according to some analysts. Due to the hurricane impacting the biggest oil belt of the US, oil prices went up in the last month. And this, they feel would have caused the increase in inflation.
Another reason given was also the cost of housing going up, specifically the cost of lodging away from home. This index was down to a record low in July, but spiked in August. This metric includes stays at hotels, and it showed its highest spike in almost two decades. According to analysts, this would be because of evacuation orders before Hurricane Harvey struck, which would have forced people to check into hotels outside the evacuation zone.
The energy index went up by 2.8% in August. The gasoline index went up by 6.3%. The housing or shelter index also went up by 0.5% and the rent index also rose by 0.4%. The food index also rose. Indexes for vehicle insurance, health care and recreation all saw a rise in the month of August. However, thanks to the impact of Harvey, the index for airline fares and used cars and trucks went down. The overall energy index rose by 6.4% for the last one year and the food index increased by 1.1% in the same time period.
Since early this year, the Federal Reserve has been struggling with weak inflation, leading the investors to worry about the bank’s ability and plans to normalize interest rates. The monthly inflation rates are critical to policy makers, as it will be key in deciding whether interest rates will be raised in December or not.
Thanks to the slight rise in inflation, the 10-year Treasury notes rose by 2 points to touch 2.2076%. The ICE Dollar index dropped 0.4% to 92.123. The index saw a small spike in intraday trading to touch 92.636 before it dropped again. This too is a reaction to the latest inflation figures.
The dollar has been struggling this entire year, and many analysts as well as investors are blaming President Trump’s disappointing failure to achieve the promised fiscal stimulation and tax reforms for the US. The political turmoil with North Korea also has not helped matters for the currency. Another reason being cited is the weak inflation rate this year.
According to Richard Perry, analyst at Hantec Markets, the dollar may be able to recover if the inflation and tax reforms can be fixed and another interest rate hike may not be necessary.
However, analysts at Goldman Sachs have something different to say. According to them, the odds for a third interest rate hike in December have grown to 60% vis-à-vis the previous odds of 55% before the inflation data reading. This is because of a firm core index. The economists at Goldman Sachs are calculating that the core personal consumption index (the Federal Bank’s favorite index to measure inflation) has gone up by 1.34% since last year, and has risen 0.16% in August this year.
With the inflation data being release ahead of the Federal Reserve meeting next week, many analysts are anticipating a motion to slow bond purchases and to begin the huge task of reducing the balance sheet.