The consumer price index (CPI) is one of the most closely followed events on the economic calendar. In the week ahead, CPI reports from New Zealand, the United Kingdom and United States will make headlines, giving investors the latest insights on inflation in each respective economy. Below is a recap of what each CPI report is expected to convey.
New Zealand
- Release Date: Tuesday, Oct 18
- Q2 CPI: 0.4% (QoQ) / 0.4% (YoY)
- Projected Q3 CPI: 0.0% (QoQ) / 0.1% (YoY)
Unlike most major economies, New Zealand issues its inflation report on a quarterly basis. Consumer inflation strengthened to 0.4% in the second quarter, up from 0.2% in the first three months of the year. However, quarterly inflation is expected to hold flat in July-September, all but confirming that the Reserve Bank of New Zealand (RBNZ) will ease monetary policy further at its November policy meeting. The RBNZ has slashed interest rates repeatedly over the past 12 months in order to boost inflation. Combined with a strong New Zealand dollar, another quarter of dismal CPI may lead to a 25 basis point reduction in the overnight cash rate.
“Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” RBNZ assistant governor John McDermott said earlier this month.[1]
In its September meeting, the Reserve Bank held its cash rate at a record low of 2%.[2]
United Kingdom
- Release Date: Tuesday, Oct 18
- August CPI: 0.3% (MoM) / 0.6% (YoY)
- Projected September CPI: 0.1% (MoM) / 0.8% (YoY)
The UK economy has been remarkably steady since the June 23 Brexit vote. Annual CPI was unchanged at 0.6% in August despite pressure from a plunging British pound. In September, annual inflation is forecast to pick up to 0.8%. However, compared to the previous month, inflation is forecast to rise just 0.1%.
So-called core inflation, which strips away volatile goods such as food and energy, is expected to rise to 1.4% in the 12 months through September, up from 1.3% the month before.
The Bank of England (BOE), which targets inflation at 2%, eased monetary policy in August for the first time since the financial crisis. This included lowering interest rates to a record 0.25% and increasing the size of its monthly bond purchasing program in order to cushion the Brexit blowback. The BOE is widely expected to ease policy further in the near future,[3] and a weak CPI report could create a sense of urgency to act sooner rather than later.
In a separate report on Tuesday, the UK Office for National Statistics will also report on producer inflation and retail price inflation.
United States
- Release Date: Tuesday, Oct 18
- August CPI: 0.2% (MoM) / 1.1% (YoY)
- Projected September CPI: 0.3% (MoM ) / 1.5% (YoY)
US consumer prices are forecast to rise at a faster rate in September, placing more pressure on the Federal Reserve to continue normalizing monetary policy by the year-end. Consumer prices are expected to rise 0.3% from August and 1.5% compared to a year ago, bringing inflation closer to the Fed’s 2% target. Core inflation is expected to rise 0.2% in September and 2.3% annually.
Last month, the Commerce Department said core PCE – the Fed’s preferred measure of inflation – improved to 1.7% annually in August. This suggests that consumer inflationary pressures are slowly building.
Traders expect the Fed to raise interest rates in December, according to the 30-day Fed Fund futures prices.[4] A strong CPI report on Tuesday will shore up those expectations and drive more gains in the US dollar. The US dollar index is currently trading at seven-month highs thanks to growing rate-hike bets.
The Fed has just two more rate meetings this year. The next policy meeting is scheduled November 1-2, a week before the presidential election.
[1] Paul McBeth (October 11, 2016). “RBNZ affirms rate cut bias to stoke moribund inflation.” Scoop Business.
[2] Sam Bourgi (September 21, 2016). “RBNZ Holds Rates Steady as Central Bank Deluge Comes to an End.” Economic Calendar.
[3] Scott Hamilton (August 4, 2016). “Carney Ready to Cut Rate Again After BOE Eases on Brexit Fallout.” Bloomberg.
[4] CME Group. FedWatch Tool.
