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Core CPI is up 0.3% m/m and 1.8% y/y, both better than expected. Headline CPI missed with 0.1% m/m but met expectations y/y with 2.1%. Retail sales rose by 0.4% and so did the core sales. Both enjoyed upward revisions, which is good news. However, the control group missed with 0.3% against 0.4% predicted.

The US dollar finds it hard to recover, especially against the soaring euro.

The US was expected to report a rise of 0.2% m/m and 2.1% in headline CPI. More importantly, core CPI carried expectations for a gain of 0.2% m/m and 1.7% y/y.

Retail sales were predicted to rise 0.4% and so were core retail sales and the control group, the core of the core.

— more coming

The dollar was clearly on the back foot ahead of the publication, dropping across the board. EUR/USD stood out with a major breakout, trading at the highest levels in three years. This was also fuelled by another breakthrough: German politicians have managed to cobble up a coalition, more than four months after the elections.

Core inflation has been stuck at 1.7% y/y for many long months. A small rise to 1.8% was only a one-off, not the beginning of an uptrend. In order for the Fed to maintain its projected path of three hikes in 2018, inflation needs to rise.

In recent months, inflation has had a growing influence over markets, rising in importance in comparison to the Non-Farm Payrolls report. Accompanied by the retail sales, the double-feature Friday clearly garners a lot of attention.

Early in 2017, prices seemed to have been picking up. They then slowed down and the Fed saw this slowdown as transitory. Fed Chair Janet Yellen focused on one-off events such as a slide in prescription drug prices and wireless charges. Yet as the months passed by, inflation remained stubbornly subdued.

The Fed went from dismissing low inflation as temporary to calling it a “mystery”.

The FOMC continued raising rates in December and also stuck to its stance of hiking three times in 2018. However, there were two dissenters, sceptic of low inflation, that opposed the rate rise.

Retail sales also remain important of course. The American economy leans heavily towards consumption and the report for the December, the Christmas shopping period, is all-important. Nevertheless, inflation or lack thereof has an outsized importance now.

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