US July CPI: Disinflationary thrust re-emerges – TDS

Research Team at TDS, suggests that the disinflationary impulse has re-emerged in the US economy as the dampening impact from the recent run-up in the dollar and falling energy prices begins to make its way through the consumer price channel.

Key Quotes

“In July, TD expects the headline CPI index to remain unchanged (up 0.023% at 3 decimal places), reflecting a weakening in inflationary momentum. The annual pace of headline inflation should remain unchanged at a relatively tame 1.0% y/y pace. Falling gasoline prices should be the key factor contributing to the flat headline print, as the 1.4% m/m decline in energy prices offset the modest rise in food prices.

Core prices should also be quite tepid, rising at a fairly subdued 0.1% m/m pace (up 0.143% at 3 decimal places), with the annual core inflation rate decelerating to 2.2% y/y from 2.3% y/y. The relatively weak performance in core consumer prices is being driven by the continued disinflationary thrust in core goods prices and some modest deceleration in core service costs. In the months ahead, we expect the inflation backdrop to remain quite weak, with the headline inflation rate remaining below the 2.0% y/y mark into early-2016, as the fallout from the resurgent dollar and recent leg lower in energy prices begins to play out.

Foreign Exchange

With the summer doldrums in full swing, we do not expect the July CPI reading to attract much attention from the FX markets. The downside risks we see to the data, if realised, suggest the ongoing lack of significant inflation pressures may add to the uneven tone seen lately in US data.

With rates markets not looking for anything conclusive from the Fed until late-2017, however, this outcome may do little more than confirm what is already priced into the curve. Still, this backdrop leaves us looking for some downside risks to USDJPY, with the 100.68 level offering key support ahead of our end-Q3 forecast of 100.”