U.S. CPI Data in Focus: Base Effect to Aid Downtrend
The markets are bracing for a day of high volatility as we await the release of U.S. inflation data. When comparing year-over-year data, both CPI and core CPI (excluding the more volatile components) are expected to show a decline, as illustrated below.
The anticipated decline in CPI and core CPI figures is primarily attributed to the base effect. We can break down the calculation as follows:
CPI (t) = CPI (t-1) + Change in CPI (t) — base effect
In the case of the regular CPI, the calculation would be 4% + 0.3% — 1.19% = 3.1%, precisely matching the expected figure. This calculation estimates the expected inflation detection by factoring in the base effect.
The base effects suggest that the August survey for the CPI will have minimal impact, with potential fluctuations over the subsequent three months. In contrast, for the core CPI, anticipate further declines in the next three months, assuming occasional monthly changes of approximately 0.3%.
It is essential to highlight that we have not observed the predicted increases indicated by the CPI at 4% and core CPI at 5.3%. However, we will likely witness increases in July, with the CPI expected to be around 3% and the core CPI around 5%. These figures are subject to confirmation and may change over time. Currently, the odds of a 0.25% interest rate hike at the upcoming meeting on July 26 stand at 93%.
The markets have started the week on a positive note, creating a sense of anticipation for the upcoming release of CPI data. It is expected that the CPI figures will show a downward trend.
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