width=232Release: US Consumer Price Index m/m
For: November
Previous Rate: -0.1%
Forecast: 0.1%

Release: Core CPI y/y
Previous:  0.1%
Forecast: 0.1%

Date/Time: 12/16/11 at 8:30AM ET (13:30 GMT)

Another Month of Tame Inflation Expected:

Inflation is expected to be tame in November, mainly as gasoline prices have dropped and weak wholesale prices means wholesalers will not feel pressured to pass along price increases to retailers and consumers.

Here is the CPI in monthly terms:

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As we can see above, inflation was negative in October in monthly terms, with core inflation (the gray bars) also cooling from the summer period, posting a gain of 0.1% in October.

In November headline and core prices are expected to rise a very tepid 0.1%, certainly not a figure that puts fear into the FOMC from an inflationary standpoint.

Let's see how this looks from in annual terms

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The telling sign here is that core annual rates have been steadily increasing throughout this year, with the core rate now at 2.1%. Headline inflation reach as high as 3.9%, but fell back to 3.5% in October.

The forecast for annual rates in November is to remain at the same level as October - a 3.5% rate for headline inflation and a 2.1% rate in annual terms.

Inflation Expectations Tame As Well

While we see that pace of current inflation in the US, what about future expectations? One of the best gauges we have for that is the breakeven rate - subtracting a TIPS Treasury versus a standard Treasury note of the same maturity. In other words what the bond market believes the difference between buying a vanilla Treasury note and one that is protected against inflation for that period.

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As we see in the 6-month view of the 5-year breakeven rate, inflation expectations have taken a significant hit during the second half of the year, falling below 2%. While there was a rally during October, we are back towards the lows we have seen this year. In other words the bond market is not expecting strong inflationary pressure.

3 Scenarios - Trading the Report

Stronger Than Expected - A Pick Up in Inflation

If we see inflation surprise to the upside, and by a big amount - say a 0.4%+ increase - it could help to boost the USD in that it would create a perception that there is some inflationary pressure perhaps building up. Because of what we see above in the breakeven rate we would need to see some further confirmation of inflation, but it would push the core annual rate further above 2% which would be problematic for the FOMC if it wants to conduct more QE.

Status Quo Release - Tame Inflation

If the monthly and core readings come in around expectations, small gains of 0.1%, it doesn't change the picture much from where we are now. The FOMC sees prospects of inflation under-performing in the year ahead and a flat reading could point to further peaking in annual rates. A status-quo release therefore shouldn't have much impact on the currency or equity markets.

Weaker than Expected - Monthly Inflation Negative

A weaker than expected report, a reading of -0.2% or less, would likely weigh on the USD as it would mean that inflation has peaked and prices are likely to come down further. It would also further confirm the expectations of the bond market and would give the FOMC a freer hand in conducting further stimulative measures if needed.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.