Dollar Falls After Inflation Data Raises Rate Hike Doubts

Dollar Falls After Inflation Data Raises Rate Hike Doubts

Eastern Time. Surprising low inflation recently has been one of the major concerns for the Fed and a key reason the central bank hasn't raised interest rates more aggressively.

Falling services costs drove USA wholesale inflation down in July, marking the first contraction in almost a year, the Labor Department reported yesterday. Core inflation, which excludes volatile energy and food changes, was also up a slight 0.1 per cent in July.

Even the core PPI reading on the monthly reading managed to turn in a -0.1% reading in July. The July result followed a tiny 0.1 percent gain in June. The cost of food consumed at home increased 0.2% after dipping 0.1% in June.

The Producer Price Index (PPI) posted its first decline in nearly a year. The index reflects both hotel prices and housing at school.

"The Fed will want to see a number of months of at least stable inflation, and preferably some uptick in inflation, before they'll be happy", said Ward McCarthy, chief financial economist at Jefferies LLC in NY.

Fed officials aren't united on the issue. Overall prices grew month-over-month for the first time since April.

Dollar Falls After Inflation Data Raises Rate Hike Doubts
Dollar Falls After Inflation Data Raises Rate Hike Doubts

Fed chairperson Janet Yellen told lawmakers in July that "some special factors", including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings. Inflation, which has remained below the US central bank's 2 percent target for five years, is being watched for clues on the timing of the next Fed interest rate increase.

The Fed is tasked with achieving maximum sustainable employment and stable prices. The unemployment rate is 4.3 percent. Inflation, however, has disappointed.

By way of backdrop, note that USA inflation has eased back in recent months after lifting tantalising close to the Fed's 2% inflation target earlier this year. Euro/dollar edged up from 1.1747 to 1.1754, while the yen gained the most, with dollar/yen sinking by 0.37% to an eight-week low of 109.31.

Markets worldwide have been tense this week as geopolitical tensions between North Korea and the USA continue to heat up. The index for natural gas fell, while the electricity index rose and the gasoline index was unchanged.

Data also on export and import prices could be important, as the dollar's 10% fall since the start of the year should be making imported raw materials and luxury goods more expensive. Food prices were unchanged in June.

The consumer-price index tends to run a little bit higher than the personal-consumption index, reflecting different methods for calculating inflation.

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