US September Consumer Price Index (CPI) will be released on Thursday October 15th. CPI measures the price for goods and services at the consumer level and is the most frequently used report to measure inflation. The CPI report is published by the Bureau of Labor statistics every month. With the price of gold at a record high and the USD trading at a 14 month low investors will be looking at the CPI report to see if the gold rally and USD decline have increased the risk of inflation. US inflation outlook is key to Fed monetary policy and timing of an exit strategy from quantitative ease. The September FOMC meeting confirmed that the Fed sees slack in the US economy and inflationary pressures muted. The Fed reaffirmed its pledge to keep yields near zero for an extended period. Low yields, aggressive Fed stimulus measures and rising US budget deficit contributes to the weakening of the USD and created the liquidity that fuels the rally in gold. Tuesday, the Fed's Kohn said that the US recovery will be gradual and deflation is more of a threat than inflation. Kohn's comments suggest that with inflation expectations well anchored an early Fed rate hike is unlikely. The Fed's Bullard says that unemployment would have to fall in order for the Fed to tighten monetary policy. US unemployment is not expected to peak before mid 2010. A Fed rate hike is unlikely before mid 2010 unless inflation emerges. Absent the threat of an early Fed rate hike the USD will likely continue to weaken. The Fed and investors will look to the September CPI report for confirmation that US inflation remains in check. If US inflation starts to rapidly rise the Fed will be confronted with the question of how to simultaneously deal with the USD decline and support the US recovery. The US inflation outlook will be key to the timing of the Fed's exit from quantitative ease, withdrawal of stimulus and the strength of the recovery.

CPI rose by a more than expected 0.4% in August compared to unchanged in July. A reading of unchanged was expected. August core inflation (excluding food and energy) rose by just 0.1% m/m. The annual CPI rate declined by 1.5%. The annual core inflation rate rose 1.4%. This marked the smallest annual core CPI gain since February of 2004. Prices of most individual sectors rose less than 1% with food prices up 0.1%, and new vehicle prices -1.3%. Energy prices rose 4.6% with gasoline prices up 9.1% in August. September CPI is expected to rise by 0.2%m/m excluding food and energy the core CPI is expected to rise by 0.1%. The September core annual rate is expected unchanged at 1.4%. Low energy prices should to keep the CPI in check as gasoline prices have eased. If the September CPI comes in line with market expectations it would confirm the Fed's forecast that inflation is contained and the report may add additional selling pressure to the USD. A surprise jump in the September CPI might increase Fed tightening speculation and support a USD rebound. It boils down to whether the CPI report supports the Fed's forecast that inflation will be contained. US jobless claims for the week ending 10/13 will be released at the same time as the September CPI. The jobless claims are forecast at -525k compared to -521k last week. Lack of jobs creation is a major headwind to the US economic recovery and a curb on Fed tightening. Kohn said that he expects US unemployment rate to rise to 10% in 2010. Jobless claims are well below the 700k losses at the start of the year but remain at an elevated level. Another drop in jobless claims will fuel risk appetite and could pressure the USD.

Figure 1 US CPI y/y