Friday's data could mean markets may now begin to question the wisdom of the Fed going ahead with a December interest rate hike.
The US Dollar slumped ahead of the weekend of much-anticipated inflation data for September showed a surprise weakening of underlying consumer price pressures.
According to the Bureau of Labor Statistics report, headline consumer prices rose by 0.5% during the month, less than the 0.6% increase forecast by economists.
Core consumer prices, a more important measure of inflation that strips out volatile energy and food costs, came in at just 0.1%. This was below the 0.2% steady reading forecast by economists.
The increase in the headline measure of inflation was largely the result of a surge in gasoline prices, which came after a series of hurricanes took more than 10% of America’s refinery capacity offline during the month.
"That leaves the annual rate tracking only 1.7%, remaining at the low end of the range seen this year. Overall, the soft core CPI numbers will weigh on US yields, and provide a headwind for the US dollar today," says Royce Mendes, an economist at CIBC Capital Markets.
Declining prices for new vehicles, household furnishings and operations, medical care, and used cars and trucks all weighed on the CPI index during the month.
The Pound-to-Dollar rate jumped by 40 points in response to the report, trading 0.38% higher on the session, up to 1.3313.
The Euro-to-Dollar rate gained more than 50 points, reversing an earlier intraday loss, to trade 026% higher at 1.18640. The Dollar index reversed an earlier gain to be quoted 0.22% lower at 92.90.
Markets have been pricing a near 80% chance of a Federal Reserve rate hike in December, despite persistent downward pressure on inflation. Friday's data could mean markets may now begin to question the wisdom of the Fed going ahead with a rate hike.
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Retail Sales Miss
Separately on Friday, retail sales data from the Census Bureau left economy watchers with mixed feelings after the headline measure missed expectations, while the core measure beat forecasts.
Headline retail sales rose by 1.6%, slower than the 1.7% projected by economists - who had expected hurricane induced car replacements to lift spending sharply.
"Consumers began replacing destroyed motor vehicles in September, a theme that will continue in other parts of the economy in the months to come," says Mendes.
After excluding big ticket items like cars, core retail sales rose by 1% during September, faster than the 0.9% growth projected by economists.
This latter result was stronger than economists had forecast and suggests that underlying consumer demand could be healthier than many give credit for.
"The hurricanes delayed some discretionary spending in affected in areas, with the September pickup focused on the necessities including food and clothing," Mendes adds.
Nonetheless, the retail data were overshadowed by poorer than expected inflation numbers, which may have elevated the importance of earlier discussions among Fed policy makers over whether there are factors weighing on inflation that rate setters are currently unaware of.
Forecasters at Capital Economics do not think this is the case and have argued that largely one-off falls in vehicle and drug prices were the predominant drivers behind the fall in core inflation.
"With temporary factors weighing on core inflation and the activity data still suggesting that economic growth is strong, we still think that the Fed will press ahead and raise rates in December," says Michael Pierce, a US economist at Capital Economics.
Pierce forecasts that the fading out of temporary factors, combined with already low unemployment and a tightening labour market, will mean core inflation rebounds in 2018.