Lee Hardman, Currency Analyst at MUFG, suggests that the US CPI report is expected to reveal that the annual rate of headline inflation has accelerated sharply to 1.5% in September up from 1.1% in August driven mainly by the fading impact of falling energy prices.
“If gasoline prices remain at current levels, the annual rate of headline inflation is expected to rise above 2.0% by early next year. Higher headline inflation should encourage a pick-up in wage growth and help lift survey-based measures of inflation expectations which have been drifting lower causing the Fed some concern.
With evidence set to build that inflation pressures are firming, it will make it more difficult for the Fed to continue tightening monetary policy at the current glacial pace potentially offering more support for the US dollar next year as US yields head higher. It supports our view that the Fed will raise rates twice next year marking a step up from the one year period it is expected to take for the Fed to follow up their first rate hike assuming of course they resume rate hikes in December.”