US October Consumer Price Index Preview

Used car prices would well serve as one of the primary indicators as well as a sizable component of rising inflation. Used car prices have witnessed a sharp increase since the mid 2021s. The latest data showed earlier in the month that used car prices dropped by 2.2% in October, resulting in a 10.6% decline from a year ago.

This development could indicate that inflation really eased in October. House rental prices, which have a 33% weight in CPI compared to 9.2% for used and motor vehicles, however, continue to rise at a steady pace. Hence, a significant fall in inflation or core inflation seems unlikely in October.

The American Consumer Price Index is expected to edge lower to 8% for October versus the previous reading 8.2% recorded in September. The Core CPI, which excludes volatile food and energy prices, is anticipated to retreat to 6.5% on a yearly basis from 6.6%.

The US Dollar has been struggling to gather strength since the beginning of the week despite the positive October jobs report and the US Fed’s hawkish policy expectations

In the monetary policy statement published after the November meeting, the Fed noted that policymakers will take “cumulative tightening, policy lags” and financial developments into account when determining the pace of rate hikes.

Although this statement hinted at the possibility that the Fed may have reached its peak hawkishness, FOMC Chair Jerome Powel reaffirmed the aggressive tightening stance. Powell said that he expected the terminal rate projection to be revised higher in December’s Summary of Economic Projections.

Powell explained that reaching the upper limit and keeping rates there is now more important than the speed of rate increases.

The US dollar managed to outperform its rival currencies following the Fed’s meeting but it came under heavy selling pressure on Friday. The US Bureau of Labour Statistics announced that NFP rose by 261,000 in October, above analysts’ estimate of 200,000 by a wide margin but failed to boost the USD as the underlying details of the report revealed that annual wage inflation declined to 4.7% from 5%.

The market reaction to the October labour market data suggests that investors are unlikely to seek refuge in the US dollar as long as CPI reading nears or comes below expectations with the prevalent idea about the probability of a 50 basis points FOMC rate hike in December currently stands at 54.4%, up from 51.5% on Fed’s November meeting.

With the annual core inflation reading of 6.5% or lower, an increase in the probability of a smaller rate increase in December is likely to rise. In that scenario, another bout of risk appetite could hurt the US Dollar and open the door to a rally in Wall Street.

On the other hand, an unexpected rise in either the headline annual CPI or the Core CPI is likely to remind investors of the Fed’s commitment to battle inflation and hurt the risk-sensitive assets while providing a boost to the US Dollar.

After breaking below the climbing trendline coming from mid-August in late October, the US Dollar Index failed to return above that level. Additionally, the Relative Strength Index (RSI) indicator on the daily chart stays below 50, pointing to a bearish bias in the short term.