US CPI is due at 8:30 am ET (1230 GMT) on Wednesday, Aug 19, 2015
The Federal Reserve is reasonably pleased with employment and somewhat comfortable with growth but there are serious questions about inflation.
Prices have barely risen over the past year and even excluding food and energy, prices are only up 1.8%.
The Fed cares less about the current numbers than what will happen in 6-18 months. What's important at the moment is the trajectory of prices.
The Fed is comfortable that it will begin to rise. For starters, the commodity crash began at this time last year and is the primary reason headline inflation is so low. Those effects will begin to roll off in the coming month.
On the flipside, a fresh headwind is the strong dollar. It makes imports cheaper and forces US companies to cut prices to compete with foreign rivals.
Here is what's expected:
- CPI up 0.2% m/m and 0.2% y/y
- CPI ex food and energy +0.2% m/m and +1.8% y/y
The headline I'll be watching most closely is the year-over-year CPI ex food and energy. The consensus is tightly bunched around 1.8% but there is an upward bias. Of the 43 estimates on Bloomberg, there are 31 forecasting 1.8%, 11 forecasting 1.9% and just 1 forecasting 1.7%.
That points to an upward bias not seen in the 'consensus'. If it's higher, the US dollar will get a lift as the market prices in a higher chance of a Fed hike in September. A weak reading would be a bigger surprise and squeeze the crowded US dollar trade.
In the event of a disappointing number, I think cable is poised to rally. The pair touched a six-week high today after strong UK inflation data. Suddenly the conversation could be about the BOE hiking rates before the Fed.