Inflation is still problematic, supporting real rates


Source: www.tradingview.com

There is still an inflation problem. The CPI y-o-y increased at a decreasing rate in the latest release - 8.5% vs last month's 9.1% (blue line chart). However, this masks underlying concerns. First, outliers affect the print in a data series like the CPI. I.e. the goods within the basket that show extreme movements may exert an overall influence, e.g. energy and food.

Energy printed a monthly increase of 4.6%, down from the 7.5% rise in June. But what about the rest of the basket in the inflation calculation? Therefore, it will be instructive to consider a median CPI print (black line chart). Here, we look dead centre, and outliers exert no undue influence. Moreover, it gives a better view of the stickiness within the CPI basket.

The latest number out of the Federal Reserve Bank of Cleveland shows an increase in the median series to 6.3% y-o-y (red leg of black line chart), with no signs of a slowdown. The resiliency of this series will impact Fed monetary policy because, at some point, it will impact the headline inflation numbers, both CPI and PCE.

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If the median inflation shows moderation, the Fed's job inherently becomes easier. I.e. the sticky inflation will be responding to the monetary policy transmission mechanism. As such, this is a critical metric to keep an eye on.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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