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US dollar weaker on disappointing inflation data

The US dollar weakened Friday, following the release of US inflation data. The number gained more importance in the wake of Thursday’s Fed minutes release.

After treading water since the open of the Friday US trading session, it lost a lot of ground against the British pound once the official figures were published. By mid-afternoon UK time, the sterling-dollar cross was around the $1.33 level, up from $1.327 ahead of the publication.

Inflation increase disappoints investors

The US Bureau of Labor Statistics CPI report, showed US inflation rose 0.5% on the moth in September, by 2.2% on the year. Meanwhile, the core measure, which strips out more volatile prices of food and fuel, accelerated by 0.1% on the month and 1.7% on the year.

According to a Bloomberg poll, the median expectation for core inflation was higher at 0.2% and 1.8%. And it’s that miss that’s mainly responsible for the US dollar weakness.

The reason? The release of the minutes from the latest Federal Reserve policy meeting, highlighted that while a December rate hike is highly likely, the pace of inflation is a potential concern regarding the future path of rates.

As the core rate of inflation remains below the 2%, it raises those concerns that the current bout of inflationary weakness might not be a short-lived as initially expected.

Inflation acceleration driven by energy costs

Indeed, the data showed that while the pace of inflation was the fastest in eight months, it was driven by an increase in energy costs in the aftermath of hurricane Harvey.

The BLS said its gasoline index rose 13.1% and accounted for around three-quarters of the overall inflation gain. Elsewhere, there was a distinct lack of substantial price rises.

And it’s this detail that is a concern for policy makers and investors. If a broader rebound in inflation doesn’t appear soon, then the Fed could opt to raise interest rates more slowly during 2018, than, until recently, was priced into the markets.

As of 14:29 BST, Friday, 13 October, GBP/USD share price is 1.3117.

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