Recent data from the US has given market participants a bit of boost as non-farm payrolls for September came in better-than-expected and we saw retail sales rise at the strongest level in eight months. While the market’s focus has remained on the possible fallout from the European sovereign debt crisis as well as weaker overall growth in the US economy, this week will turn the focus on US inflation data, at least for a spell here mid-week.

Consumer Prices Marching Steadily Higher

While commodity prices accelerated in the first half of the year, overall price pressures have been subdued, though they have been trending steadily positive over the last eight months.

As you can see from the chart above annual CPI at the headline level is at 3.8%, while the core CPI was at 2% in August.

CPI for September is due out Wednesday, and the expectation is for the headline reading to rise 0.3%, after a 0.4% advance in August. That increase would be the smallest in 3 months. The core rate is expected to climb 0.2% on the month, which would be the same reading that we saw in August. If we look at the annual figures, the expectation is that the headline rate will stay the same at 3.8%, while the core rate climbs to 2.1%.

Why should investors care? Well, the fact that inflation expectations were contained and labor costs have not climbed, have the Fed scope to purse monetary policy geared at stoking the economic recovery. Where the Fed was concerned about inflation at the beginning of the year, the focus there has shifted to concerns about growth.

Fed’s Current Concern is on Growth, Not Inflation

Fed officials, at their September 21st meeting anticipated both core and headline inflation was “likely to settle, over coming quarters, at or below the levels they see as most consistent with their dual mandate,” according to the minutes which were released on Oct. 12.

“With stable inflation expectations, significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline moderately over time,” the minutes said. Participants also saw “considerable uncertainty surrounding the outlook for a gradual pickup in economic growth.”

Therefore, if we see inflation – especially the core reading – coming in stronger than expected it could help shift the debate at the Fed. We know that we have 3 dissenters to the Fed’s recent actions, with concern about inflation being a major sticking point.

Higher inflation would help the USD from the fundamental dynamics as it would mean less lee-way for the central bank to take further stimulus measures to help the economy.

Weaker readings on inflation would do the opposite, leaving the door open for more stimulus if needed, which would be a negative for the USD from a fundamental perspective.

Producer Prices to Rise Again in September, but Core Reading to be Tame

Prior to the consumer price index on Wednesday, we get the producer price index on Tuesday which is expected to show a headline reading of 0.3% in September, after no change in August. Producer prices tend to get passed on to the consumer price index as wholesalers and retailers that pay more to purchase goods from manufacturers push those price increases onto their consumers. Therefore its a leading indicator for CPI. The core PPI rate, which excludes food and energy, is expected to increase at just 0.1%, the same as in August, which would be a sign that inflation pressures continue to be subdued.

In annual terms producer prices are running at a 6.5% pace in August, with core PPI at 2.5%. The expectation is for both of those readings to ease slightly in September to 6.4% and 2.4%, respectively.

Here, the trend has been a little bit different than what we see in annual consumer prices, as headline PPI has attempted to peak during the summer months, which could translate to a topping off in consumer prices as well in the coming months. such a development would again further the case for more monetary stimulus if needed, while a reading that is stronger-than-expected could complicate that prospect.

- Nick Nasad is the Chief Market Analyst at FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.