Inflation data fails to convince markets of additional Fed rate hike

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"Hotel room rates are notoriously volatile and, consequently, we would normally expect July's fall to be reversed in August", said Paul Ashworth, chief economist at Capital Economics, in a note to clients.

The Consumer Price Index (CPI) measure of inflation is forecast to hit 2.7% for July, up from 2.6% in June, according to consensus figures. Mobile phone prices continued to decline in July, falling 0.3 per cent.

The Labour Department yesterday said its Consumer Price Index (CPI) edged up by 0.1 per cent last month after being unchanged in June. Just when the Fed though it had won the inflation battle, victory was snatched from its hand's within a matter of months.

The move to reduce the Fed's holdings of Treasury bonds and mortgage-backed securities is expected to prompt modest increases in long-term rates, including mortgage rates.

The Fed is tasked with achieving maximum sustainable employment and stable prices.

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In addition to the low unemployment rate, Dudley said the U.S. dollar is weakening "so that should have some consequences for import prices", which in turn will push up depressed goods prices.

"We've been sitting in the same range of around 1.5% to 2 %", said Tim Courtney, CIO of Exencial Wealth Advisors, a registered investment adviser.

US two-year yields sank to an eight-week low of 1.314 percent, down from Thursday's 1.335 percent. That's what markets are counting on, which adds to the upside risk to equity prices once the Fed concedes and winds back its interest-rate tightening intentions. The index for natural gas fell, while the electricity index rose and the gasoline index was unchanged. Prescription drug prices also dropped back earlier this year, partly as a correction to strong gains in 2016.

At the time of the report, the Dollar Spot Index was up 0.09% at 93.488, recovering an the Asian session low of 93.312, with the real question being how far the Dollar can slide should today's numbers disappoint, with FOMC members Kaplan and Kashkari scheduled to speak after the release of the data. Core prices had also been expected to climb by 0.2%. Both gauges have followed the same pattern. Core PCE inflation has average only 1.7% an annual inflation on this basis has been below 2% for around 75% of the time.

Market confidence in higher inflation has gradually eroded over the past 2-3 month, especially with a series of slightly weaker than expected inflation reports.

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