Calling for a peak in inflation may be premature
Tuesday saw headline inflation print at the forecasted 1.2% m/m, higher than the 0.8% m/m for February. However, the core CPI moderated at 0.3%, lower than the forecasted 0.5% m/m and below February's 0.5%m/m. This temperance in the core number has some investors maintaining that US inflation has peaked. However, we believe this may be premature and proffer that more evidence is needed in this regard. Consider the chart for core CPI:
Source: www.tradingview.com
We have added an RSI to the core CPI chart. This indicator applies a measure of momentum to the tremendous appreciation of the series. In addition, it allows us to assess how extreme the move has been and if it is "running out of steam" per se. The RSI is above the 85 level (grey dashed horizontal). In the series above, this happened three times previously - 1969, 1974, and 1979. Moreover, 1974 coincides with the first oil crisis and 1979 with the second oil crisis. All three of these instances saw the RSI continue to appreciate over 90 (black dashed horizontal).
As an added layer of analysis, we have included a 9-period exponential moving average as a signal line for the RSI (blue line). After peaking above 90, we note that the RSI began its retreat, followed by crossing below the blue signal line (blue vertical dashes). These crossovers mark levels near or at the core CPI peaks for the periods (we note the lag in 1969).
Indeed, current core CPI levels are reaching excess and are approaching an apex. However, to maintain that the series has peaked is premature. Whilst it is still to be seen if core CPI's RSI will rise above 90 (it may not), a cross below the blue signal line will make us more comfortable with the declaration that inflation has topped.
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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