Reuters reported on Friday, Sept. 16, 2016, about the current dismal state of inflation in the U.S. This is evident from the figures released by different government departments. All of them suggest that, at present, the cost of living is the single most predominant factor driving up prices in the U.S. The onus for the upward spiral in price-levels falls on two elements; the cost of accommodation and medical services. Both of them are on a constant rise. Thereby, indicating that U.S. inflation currently piggybacks an expensive housing and healthcare sector.
According to Reuters, the statistics released by the U.S. Labor Department suggest that the consumer prices in the month of August registered a record-breaking high, not seen since 1984. This is evident from the latest monthly and yearly growth figures available for the Consumer Price Index (CPI) and core CPI. For the uninitiated, the Economics Help website reports that CPI measures the cost of living for the typical person, while the core CPI denotes a figure that is devoid of food and energy prices.
Both the indices have defied the economists’ expectations. CPI and core CPI for August increased by 0.2 percent and 0.3 percent, respectively. This was the opposite of 0.1 percent and 0.2 percent, which the economists’ had forecast. Similarly, the annual CPI and core CPI for the last 12 months until August rose by 1.1 percent and 2.3 percent, respectively. Interestingly, the plummeting fuel and grocery prices, both of which, declined by 0.9 percent and 0.2 percent, respectively, according to USA Today, were insufficient to offset the two escalating economic health indices.
In a similar vein, Reuters reported that the medical expenses also soared to 1 percent in August, with hospital services costing 1.7 percent more than earlier, alongside a 1.3 percent hike in the prices of prescription medications. Unfortunately, the economic brain trusts view it as the largest leap, that the therapeutic outlay has taken in the last three decades. The intellectual coterie also attributes these rising metrics to President Barack Obama’s 2010 healthcare restructuring law. They believe that an expanded health care coverage, which was a major component of the legislation, has led to the present inflationary situation.
Likewise, even the shelter costs have experienced a continuous rise. According to USA Today, the house rent an average American currently pays jumped up by 0.3 percent last month. Further, it has demonstrated a similar growth rate pattern since April, as suggested by Reuters. Indeed, the U.S. inflation does appear to piggyback an expensive housing and healthcare sector.
Amidst all the gloom surrounding the existent inflationary situation, a “silver lining in the cloud” is an invigorated U.S. dollar, that has also revived itself against a basket of currencies. FX Street reported that on September 17, in Australia, the American currency initially lost to the Japanese Yen by hitting a low of 101.75, but afterward rejuvenated back to 102.13 in Asia. Unfortunately, this gain did not last much as the dollar again ebbed to 101.77 in Europe. However, in New York, it soon recouped back to a closing high of 102.46. Similarly, in comparison to the European euro, the American dollar continued to weaken and reached a figure of 1.1220 before the news of U.S. inflation broke out. However, soon after the release of inflation data, the greenback gained by 1.1149 ahead of the New York close.
Moreover, the dollar did start manifesting signs of a possible increase on September 16 itself, when the CPI soared by 0.2 percent, mentioned earlier. The triggered greenback boost is expected to continue in the coming week ahead of the Federal Reserve meeting scheduled on September 21.
Finally, the market is keeping its fingers crossed over the possible outcome of the upcoming meeting of the U.S. Central Bank, which is the cynosure of attention. The industry focus currently rests on the interest rate change decision, which the Fed is likely to take based on a steadily building inflationary situation in the U.S. that piggybacks on expensive housing and healthcare sector.
According to USA Today, three likely market scenarios are in the offing, depending on what the Central Bank decides.
The first scenario has a 10-15 percent chance of occurrence. Here the Fed might hike the September rates. If this happens, it would be the most bearish outcome, taking a heavy toll on the market. The U.S. stocks, including government bonds, would suffer a sharp decline, as their short and long-term yields would sharply increase. Even though, the dollar would go up, but at the same time, it would bring down the commodity prices, including oil.
The second scenario has a 70-80 percent probability of occurrence. Here the Fed might postpone the interest rate hike to December. This is the most well-priced scenario having minimal impact on the financial assets, as USA Today suggests. Since, having knowledge beforehand that a hike is in the cards towards the year-end, would at least soothe the investors’ frayed nerves, giving them time to mentally prepare for the development and act accordingly. Instead of inviting a knee-jerk reaction from them.
The last scenario has a 10-15 percent chance of occurrence. Here the Fed might decide not to hike any interest rates in 2016, and postpone the decision for 2017 or beyond. This would be a pleasantly bullish scenario for the market as a whole, including the investors. Since here the Central Bank would be seen easing its outlook on economic growth and inflation.
By Bashar Saajid
Edited by Cathy Milne
REUTERS: U.S. inflation stirring as healthcare, housing costs surge
ECONOMICS HELP: Difference between CPI and Core CPI
USA TODAY: Inflation accelerated in August even as gas prices drop
USA TODAY: 3 market scenarios based on Fed’s next move
FXSTREET: Week Ahead USD Rises After US Inflation Boost
FXSTREET: Dollar rallies broadly after U.S. inflation exceeds forecast: Sept 19, 2016
Top and Featured Image Courtesy of frankieleon’s Flickr Page – Creative Commons License
First Inline Image Courtesy of 401(k) 2012’s Flickr Page – Creative Commons License