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U.S. core CPI's July increase was a surprise - ING

  • James Knightley, the chief international economist at ING, notes the U.S. headline and core consumer price inflation both rose 0.3% MoM in July, which was enough to push the annual rates of inflation up to 1.8% and 2.2% respectively. 
  • "The headline increase was as expected, but the core increase was a surprise. This is the second 0.3% monthly increase in a row, something that hasn’t happened since 2001. It perhaps provides some food for thought  given that everyone is expecting the Federal Reserve to cut interest rates further in the next few months.
  • Even though core inflation is moving higher, it is the outlook for economic activity that is driving sentiment right now. The market is assuming a US downturn is coming due to intensifying trade tensions, weaker global activity and dollar strength. The view is that this will dampen price pressures over the medium term and give the Federal Reserve significant room to cut interest rates – the market expects four 25bp cuts over the next 18 months.
  • However, there is the possibility of a more positive economic scenario. A strong jobs market and rising real wage growth keep consumer spending strong – watch out for another decent retail sales report on Thursday. This can help to offset weakness elsewhere before a more durable US-China trade truce is potentially struck later in the year.
  • With inflation close to target and equity markets likely to rally hard on a positive trade outcome we could end up seeing a significant re-evaluation of the outlook for monetary policy later this year that also results in a sharp correction higher in Treasury yields. Our house view remains two 25bp rate cuts in the second half of 2019."

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