The US inflation data is expected to show an increase in the price of goods and services in the previous month. The data is critical for positioning ahead of the Fed’s meeting next Wednesday.
Inflation in the United States is expected 0.4% higher in May, and the core data, which excludes the price of food and energy, to grow by 0.5%. The previous data for the month of April triggered inflation fears as the actual exceeds the forecast by the most in more than three decades.
A declining currency confirms the higher inflation expectations and the outlook for higher prices during the summer months and beyond. Yet, the Federal Reserve sees inflation as transitory, just as other major central banks in the developed world do.
However, the Fed may need to change its stance sooner than anticipated, should prices of goods and services accelerate faster. As the Non-Farm Payrolls report last Friday showed, businesses have a hard time hiring, and this typically translates into higher wages. Rising wedges lead to cost-push inflation, so the stage is set for rising prices.
The big question for traders and investors is by how much will inflation rise. Also, what is the Fed’s threshold when it comes to averaging inflation? Last year the Fed chose the Jackson Hole Symposium to communicate the shift from targeting 2% inflation to averaging 2%. But it failed to mention the period over which the averaging takes place.
Rising Wages Lead to Cost-Push Inflation
Inflation shows the change in the price of goods and services over a period. Typically, that period is one month.
It can be triggered by an increase in oil prices, or excessive M2 supply, or increased money velocity. In any case, rising prices up to a certain level benefit the economy. This is why the 2% level is viewed as optimal for sustainable economic growth so that consumer spending is stimulated just enough for the economy to grow sustainably.
The rise in wages is a fact. The leisure and hospitality, retail trade and transportation and warehousing industries lead the increases.
But businesses tend to offset the higher labour costs by raising the price of their goods and services. Hence, inflation expectations grow first, and the PPI and the CPI follow next.
All in all, today’s US CPI report has the power to move markets. Depending on the outcome, investors may try to position in anticipation of next week’s Fed decision.