US Inflation Updates
The annual inflation rate in the US, as measured by the consumer price index (CPI), climbed from 2.7% in July to 2.9% in August, according to the US Bureau of Labor Statistics (BLS). This was in line with what analysts were predicting. Month-over-month, the CPI increased by 0.4%, a step up from the 0.2% rise noted in July.
The core CPI, which excludes food and energy prices that can fluctuate, also saw a yearly increase of 3.1% in August, consistent with previous estimates from July.
BLS pointed out that the shelter index was a key factor in this uptick, rising by 0.4% in August. The food index went up by 0.5% overall, with at-home food costs increasing by 0.6%, while dining out saw a 0.3% rise. Similarly, the energy index edged up by 0.7%, largely driven by a 1.9% increase in gasoline prices for the month.
Market Reactions to CPI Data
In the immediate aftermath of the CPI report, the US dollar (USD) faced some softening pressure, with the dollar index slipping by 0.06% to 97.75.
Current US Dollar Valuation
The rate changes for the US dollar against major currencies are detailed below. On this particular day, the dollar was notably weaker against the euro.
| Currency | USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF |
|---|---|---|---|---|---|---|---|---|
| USD | -0.20% | -0.07% | 0.18% | 0.03% | 0.04% | -0.04% | -0.16% | |
| EUR | 0.20% | 0.10% | 0.21% | 0.21% | 0.19% | 0.18% | -0.01% | |
| GBP | 0.07% | -0.10% | 0.12% | 0.08% | 0.02% | 0.07% | -0.12% | |
| JPY | -0.18% | -0.21% | -0.12% | -0.05% | -0.08% | -0.05% | -0.23% | |
| CAD | -0.03% | -0.21% | -0.08% | 0.05% | -0.14% | -0.03% | -0.19% | |
| AUD | -0.04% | -0.19% | -0.02% | 0.08% | 0.14% | -0.01% | -0.19% | |
| NZD | 0.04% | -0.18% | -0.07% | 0.05% | 0.03% | 0.01% | -0.21% | |
| CHF | 0.16% | 0.01% | 0.12% | 0.23% | 0.19% | 0.19% | 0.21% |
The heatmap indicates how each currency has shifted relative to one another. The selected base currency appears in the left column, while the estimated currency is shown in the top row.
Looking Ahead: CPI Projections
The upcoming release of CPI data is crucial, with a year-over-year expectation of a 2.9% increase in August, following the 2.7% rise in July. Core CPI inflation, which excludes the more volatile categories, is expected to rise to 3.1%, again consistent with the previous month’s trend.
Monthly changes in both CPI and Core CPI are projected to be around 0.3%.
Analysts from TD Securities believe that the August report will highlight how commodity prices reflect gradual tariff impacts, suggesting that service inflation may be more stable going forward. They anticipate a total CPI rise of 0.4% month-over-month, driven by increases in energy and food prices.
Impact of CPI Reports on the Dollar
As the inflation data approaches, investors appear confident that the Fed will implement a 25 basis point rate cut in their upcoming meeting. The current market consensus, according to the CME FedWatch tool, shows a 92% probability of such a reduction next week.
However, there have been varying opinions among Fed officials regarding future inflation trends.
Chicago Fed President Austan Goolsbee mentioned the potential for rising inflation, while Minneapolis Fed President Neil Kashkari commented that product inflation might be driven by tariffs. He stressed the importance of monitoring price changes linked to tariffs to assess sustainable inflation.
On the flip side, San Francisco Fed President Mary Daly suggested they only expect a temporary increase due to tariffs and are prepared for potential cuts soon. Meanwhile, Federal Governor Christopher Waller indicated that the current inflation spike might be short-lived, anticipating inflation to stabilize around 2% within six months.
While a 25 basis point cut is largely anticipated, unexpected inflation data could lead to reassessments regarding other potential rate reductions for the year. The CME FedWatch tool indicates a 70% chance that the Fed may reduce rates by a cumulative 75 basis points by year-end.
If the core CPI exceeds expectations, the market might lean towards a total reduction of 50 basis points, which could bolster the USD in the short term. Conversely, softer readings could confirm three rate reductions and weaken the dollar.
On a technical note, Eren Sengezer, a lead analyst at FXSTREET, shared insights regarding the USD index. The current outlook suggests a slight bearish trend, with the index’s relative strength index (RSI) below 50 days and the 20-day simple moving average (SMA) slightly exceeding the price.
If the index maintains stability above 98.10 (20-day SMA, 50-day SMA) and uses this level as support, it might encounter resistance around 98.65 (100-day SMA) before the 100.00 round figure. Conversely, potential support can be found at the 97.00 level.
Inflation FAQs
Inflation is generally understood as the increase in prices for a standard collection of goods and services. Headline inflation is typically reported as changes in monthly and yearly percentages. Core inflation omits more unpredictable elements like food and fuel, which can vary due to various factors, including seasonal or geopolitical events. Economists focus on core inflation as it is crucial for central banks to manage inflation levels, usually targeting around 2%.
The Consumer Price Index (CPI) tracks price changes in a collection of goods and services over time, reflecting percentage changes on both monthly and yearly bases. Core CPI serves as a benchmark for central banks because it excludes volatile food and energy inputs. When core CPI rises above 2%, interest rates often follow suit, and the inverse holds true. Higher inflation typically results in a stronger currency.
This can seem counterintuitive, but in fact, significant inflation can elevate a currency’s value. This happens because central banks may hike rates in response to inflation, drawing global capital in search of stable returns.
Investors typically regard gold as a safe haven during bouts of high inflation, but rising inflation also leads central banks to increase interest rates, which in most cases harms gold values. In contrast, lower inflation tends to support gold as falling rates make this type of investment more attractive.
