US CPI: Headline inflation is expected to breach the 2% mark - TDS

In view of the analysts at TDS, US headline inflation is expected to breach the 2% mark for the first time since 2014, reflecting a jump in energy prices and a recovery in food prices.

Key Quotes

“TD expects inflation to accelerate to 2.0% y/y in December, reflecting a 0.2% increase in prices on the month. Energy prices should be higher across the board while producer level and global commodity prices point to a rebound in food prices following months of declines. However, we are hesitant to pencil in too much upside in the latter, which can explain our below-consensus estimates.”

“Excluding food and energy movements, core prices are expected to rise 0.2% on the month, keeping the core inflation rate at 2.1% y/y. Core prices are expected to be supported by gains in healthcare and transportation services prices and the continued strength in home and rental prices. But potentially offsetting are core goods prices due to recent USD appreciation and sustained weakness in core import prices.”

“Foreign Exchange

With many still at odds with respect to USD direction, we doubt that a below consensus reading on headline CPI will give much conviction for FX markets particularly ahead of key event risks this week including the ECB meeting and Trump's inauguration. The underlying core measures are expected to remain solid so we are inclined to think that the USD and major crosses trade sideways through the release. Given the positioning skew favoring USD longs however, we nonetheless view the risks of a reaction as more sensitive to a negative CPI surprise on the core measure. In this vein, USDJPY is most vulnerable. 112.50 acts as key near-term support (50% Fibo retracement from the June 2015 cyclical high). Below this, we view 111.30 as a key pivot level as well.”