High inflation rates have had knock-on effects on trading and investment since the second quarter. This week is no exception, with Consumer Price Index (CPI) reports from the US and EU set to be released on Thursday, October 13. Market participants are already bracing themselves for possible surprises.

What to expect from September CPI reports

The US Federal Reserve is focused on core inflation and wants to see high prices tamed in all sectors, not just the housing sector which has contracted in recent months. Tomorrow’s CPI report excluding food and energy is expected to come in at the level of 0.5 percent in September compared with 0.6 percent in August. On an annual basis, the CPI result excluding food and energy is expected to be at the level of 6.5 percent compared to 6.3 percent in September 2021.

If core inflation has risen more than expected, it will increase the likelihood of the US central bank to keep pumping up interest rates on borrowing. This would further affect the mortgage sector and investment sentiment which relies on access to credit to maintain strong growth rates. The USD might gain support on the back of safe-haven buying.

The opposite scenario of a reduction in inflation is less likely given the ongoing post-COVID-19 economic changes and drive towards returning to normal. Still, if by any chance inflation has subsided, there might be a case for the Federal Reserve to soften its hawkish stance in favour of supporting wider economic growth.

The Eurozone’s largest economy, Germany, will release harmonized annual inflation rate results for September. The market expects CPI to come in at the level of 10.9 percent and anticipates another interest rate hike from the European Central Bank (ECB). The head of Europe’s central bank, Christine Lagarde, is hawkish on high inflation and plans to keep raising interest rates until high prices are under control.

With the EUR already on the back foot against the US Dollar, the Eurozone’s single currency might be supported by a lower-than-expected result. Then again, if CPI results are higher than expected, there may be further pressure on the EUR.

China’s CPI report is also due out on Thursday and is expected to have risen from 2.5 percent in September 2021 to 2.8 percent in September this year. China’s zero-tolerance COVID policy has slowed industrial production and the inflation effect seen in other countries, but prices appear to be creeping upwards, nonetheless. The CNY currency crosses might be affected by any surprises during tomorrow’s trading news release.

Quick Tip 

Are inflation rates always so influential in the markets?

Yes and no, it all depends on economic conditions and monetary policy context. If inflation is higher than 2 percent, most central banks will start raising interest rates to keep spending and demand under control. If it’s lower than 2 percent and the economy is weak, many central banks will decide to reduce interest rates in order to encourage spending and investment.

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