Markets

Why the Fed is watching inflation data so closely

Why the Fed is watching inflation data so closely

US consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation that could diminish prospects of a third interest rate increase from the Federal Reserve this year.

The Commerce Department reported separately that the falling price of petrol also helped to hold down United States retail sales, which contracted for the second straight month in June.

CPI is expected to rise 0.2 percent on a month-to-month basis after a 0.1 percent increase earlier month, a soft result may wane Fed rate hike speculation even more therefore burdening the United States dollar. It is also benefiting from United States dollar weakness as signs the Federal Reserve will pursue only a gradual rate tightening path weigh on the greenback after Senate testimony from Federal Reserve chair Janet Yellen.

Core prices are viewed by the Federal Reserve (Fed) as a better gauge of longer-term inflationary pressure because they exclude the volatile food and energy categories.

Excluding auto sales, retail sales still dipped by 0.2% in June following the 0.3 decline seen in May. Overall retail sales fell 0.2 per cent for the month to US$473.5 billion (S$651.7 billion), a surprise to analysts who had forecast a 0.1 per cent rise.

Final data from the Ministry of Economy, Trade and Industry showed that Japan's industrial production declined more than estimated in May. Food and beverage stores were down 0.4%, department stores were down 0.7% and restaurant sales were down 0.6%.




The stakes have gotten even higher for US inflation data set to be released Friday. The Aussie was on track to rise 1.7 percent on the week, lifted by an improvement in broader investor risk appetite thanks to hopes for a more gradual tightening schedule by the Fed and rise in prices of commodities, notably iron ore. Economists had forecast the CPI edging up 0.1 percent last month and climbing 1.7 percent from a year ago.

Industrial output fell 3.6% on a monthly basis instead of 3.3% decrease estimated previously.

In a bad year for the US Federal Reserve's inflation goal, Friday's consumer price index release will mark something of a milestone. Exports grew 2.1% from April and imports by 1.6%.

The euro added 0.1 percent to 1.1416 against the dollar while the British pound was also 0.1 percent higher to 1.2966, a breakout of 1.2984 would likely lead the pound to a high of 1.3051.

South Africa's rand hit a two-week high against the greenback. Further downtrend may take the greenback to support levels of around 1.25 against the loonie and 0.80 against the aussie.


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