US headline CPI inflation to firm to 2.3% y/y - TDS

Analysts at TDS expect US headline CPI inflation to firm to 2.3% y/y in November, with prices up 0.4% m/m and suggest that energy prices should be a net positive, helped by higher gasoline prices, while continued subdued gains in food prices cannot be excluded.

Key Quotes

“Base effects for the latter, however, still point to a y/y acceleration. Excluding food and energy, we expect a 0.2% m/m increase in core CPI. A key driver is core goods prices, which in the prior month posted its first m/m increase since January. We believe another m/m gain is possible on the back of firming import prices, keeping the core inflation rate stable at 1.8% y/y.”

“Hurricane distortions are fading from this report but won’t be completely gone in November. The Fed will look past an energydriven increase in headline, with stability in the core being the best Fed officials can hope for right now. Some Fed policymakers have highlighted sequential improvement in core inflation as supportive of a gradual increase in interest rates; after a sharp pullback earlier this year, the three-month annualized core inflation rate has improved to levels seen during 2015 and 2016. However, a further acceleration would require a 0.3% m/m or stronger print for November. More dovish members are likely to remain concerned about the low inflation trend. In the end, this report won’t impact the Fed’s plans to hike at its December meeting, nor materially change the expected path for inflation or rate hikes in the Summary of Economic Projections.”

“Foreign Exchange

With our expectation for core inflation to remain at 1.8% y/y (the consensus view), we struggle to think that the USD will be impacted in a major way even if headline CPI surprises to the upside— especially ahead of the FOMC decision. That said, we think that the risks are slightly asymmetric for the USD; with so much priced into the curve, the USD should be more sensitive if core inflation fails to register a 0.2% m/m which could see the year-ago measure slip below expectation and see the market price in more caution into the Fed’s inflation outlook. In such a scenario, we think downside for the USD will be contained given the Fed decision looming a short few hours later.”