As markets prepare for the latest announcement of the Federal Open Market Committee’s meeting minutes later today, it is important to note that most economic indicators are not necessarily lining up in support of higher interest rates as evidenced by today’s CPI numbers. Monthly core consumer price inflation saw a surprisingly miss of expectations printing at 0.10% versus 0.20% and sparking a quick bout of turmoil in the US dollar before recovering and strengthening further. Although the annualized figures showed no demonstrable change from prior numbers, the slowdown in inflation or disinflation is likely the reflection of the most recent bout of weakness in energy prices. While other developed nations are showing a slight uptick in inflation, the United States still lags behind peers as further accommodation to spur inflation is an unlikely policy move. Based on the current trajectory, it is even feasible to see the United Kingdom be the first developed economy to raise interest rates if the recent yuan devaluation is considered worrisome by Federal Reserve policymakers.
Today’s consumer inflation revelations showed that core prices were climbing at the slowest rate since 2014 as rents and household energy prices continued to prove the main drivers behind the modestly positive figure. However, what is still missing from any recovery is the spending uptick. The problem inherent in that narrative is the reality that consumption is unlikely to recover in the near-term, owing to a number of factors, not least of which is Obamacare, which continues to drain disposable income from middle and low income workers. Today’s FOMC Meeting Minutes could prove an absolute show stopper or conversely a nonevent depending on the content of the minutes. However, based on the latest economic numbers and external developments, namely China, it may be wise of the Federal Reserve to proceed with caution and avoid adding to the prevailing volatility. Any hints about the timeline for higher rates will likely send the dollar moving, with a postponement denting the recent reversal higher in the dollar. Should markets find confidence in the Federal Reserve’s ability to begin liftoff next month, it is likely to send the dollar soaring and gold tumbling. Nevertheless, today’s CPI numbers hurt the probability of a September hike as the Fed seeks to spur inflation and see further anchoring.