US Inflation Preview, what to expect

Consumer Price Index (CPI) data for September on Thursday

It is difficult to see the impact of the US midterm election in the immediate aftermath. The dollar is stronger against all the major currencies, but this seems to be mostly position adjusting ahead of tomorrow’s very important CPI report after a pullback in recent days.

Most investors will use this to gauge the FEDS next move. Todays midterms did little to support the stock market. The USD has rallied strongly today.

The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for September on Thursday, October 13 at 12:30 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 10 major banks regarding the upcoming US inflation print.

On a monthly basis, the CPI is expected to rise by 0.2%. The Core CPI, which excludes volatile food and energy prices, is expected to have risen by 0.5% last month, which is below August's 0.6% read. Headline is expected at 8.1% year-on-year vs. 8.3% in August, while core is expected at 6.5% YoY vs. 6.3% in August.

US Inflation month on month

So what is the CPI in layman terms.

It is simply the change in the price of goods and services purchased by consumers, us the public. It gives us the best indication of the state of the cost of living, as we are aware, the cost of living crisis , is on everyone's minds. Not just increases in energy prices such as gas and petrol, compounded by the Russian invasion of Ukraine but also food and services.

It is effecting everyone and it is also the main priority of the central banks. The FED reserve, US Central Bank, clearly reaffirms at every opportunity that their main concern and their man focus is to reduce inflation at any means. This means that if inflation remains high, or even higher than the analysts predict, their is a very strong case for the FED to carry on it's aggressive rate hike, next month.

If this is the case. This will stop the so called pivot in its tracks.

  • The USD will strengthen against its peers

  • The stocks will wobble

  • Gold will fall.

  • The cost of borrowing will rise.

So what to expect?

The past three CPI reports triggered violent market reactions – a rally in response to July's data and crashes in the following two months. There is no reason to expect a different outcome this time, especially as liquidity has dropped. The Fed is withdrawing money from markets as part of its tightening.

Three scenarios

1) Within expectations: A monthly increase of 0.5% would still represent an annualized increase of over 6%, substantially above the bank's 2% target. On the other hand, it would be lower than 0.6% recorded in the past two months. How would markets react to 0.5%?

This is where the market mood comes into play. China has been consistently denying rumors about loosening its covid zero policies, yet with every official rejection of this narrative, investors seem to believe it. "Never believe a rumor until it is officially denied" – this saying, associated with Otto von Bismarck, seems to be markets' mantra.

The same positive market reaction seems to resonate with the reaction to Friday's Nonfarm Payrolls. The robust rise in jobs and wages seemed sufficient to boost the US Dollar at first – but that didn't hold. An increase in the unemployment rate – to merely 3.7% – may have served as food for Dollar bears.

Therefore, a 0.5% Core CPI outcome, which would show underlying inflation is still hot, would be insufficient to knock stocks down or buoy the Dollar. Markets would shake and perhaps look for a surprise in the yearly figure. After a while, I expect the optimistic narrative to prevail, pushing shares up and the greenback down.

2) Below expectations: I initially thought that a monthly increase of 0.4% would also be within estimates, as it reflects an annualized level of around 5%. Nevertheless, the recent market behavior has convinced me that 0.4% would cheer markets. A 0.3% would be even more cheerful – that triggered a big upswing three months ago.

While one weak month could be dismissed, the Fed may be more open to talking about lower interest rates once the elections are over and political pressure is weaker.

To see substantially lower inflation, the shelter component would need to remain calm and items outside the automotive industry would need to suffer early Black Friday discounts.

The Dollar would extend its losses and everything would be set for a "Santa Rally"

3) Above expectations: A repeat of 0.6% as in the past two months or meeting the yearly peak of 0.7% as seen in June would deal a blow to markets. It would shatter hopes of a lower terminal rate and raise the chances of a fifth consecutive 75 bps hike in December.

In such a scenario, stocks would tumble back down and the Dollar would reclaim its throne. Shelter is the wildcard.

Final thoughts

No one knows the future, accept those that do!!

Trade with care and lower your leverage around this critical release.