After US CPI – Commerzbank

The case we discussed yesterday has arisen: US core inflation in August was +0.28% above market expectations of +0.2%. This means that if inflation over the next twelve months were to be as high as in August, it would exceed the Fed target. Rates from the previous month are notoriously volatile. Therefore, they have to be smoothed. The exponentially weighted moving average (EWMA) is almost exactly in line with the Fed’s target, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Rapid interest rate cuts to contain deflation risks

“This means that the market’s fear has not been confirmed: that instead of excessively high inflation becoming a problem for the Fed, excessively low inflation will now become the new problem. But at least the current core CPI figures suggest that the Fed’s target has already been met and that the talk of the supposedly particularly difficult ‘last mile’ has apparently not materialized. This would give the Fed room to devote its full attention to a weakening labor market.”

“However, the situation in the US labor market is not dramatic enough to justify 100 or even 125 basis points of Fed rate cuts at the next three meetings. This would require a faster and more pronounced cooling of the labor market or even inflation well below target. In this case, rapid interest rate cuts would be advisable because they would contain deflation risks. Yesterday’s data indicated that this scenario has not yet materialized. The fact that the USD was unable to appreciate more strongly nonetheless can probably be attributed to two reasons.”

On the one hand, something may yet come that has not yet come. It’s easy to identify a clear trend of falling month-on-month inflation rates since 2022. This development might just stop exactly at the Fed’s target, if the timing of its interest rate policy has been absolutely perfect. With all due respect, this degree of precision is unlikely. It is more likely that the inflation rate trend will actually slip below the Fed target in the near future. On the other, the US labor market could continue to weaken. All in all, there was no reason yesterday to revalue the USD more than marginally. The days of spectacular USD movements following CPI releases are over.