Stagflation a threat to US dollar

The US dollar jumped suddenly after yesterday’s release of better than expected inflation data and then suddenly reversed into negative territory which left investor’s scratching their heads as to why the later happened.

Consumer Price Index figures on a monthly basis hit the market at 0.5 percent which was well above analysts’ expectations for a figure of 0.3 percent while the yearly figure came in at 2.1 percent which also beat consensus for a figure of 1.9 percent.

The inflation numbers are now within the US Federal Reserve’s target range of between 2 and 3 percent which seems to give the green light for around 4 rate rises this year (provided inflation remains around or higher than the current range)

There was one other release yesterday that was overshadowed by the CPI figures but may be a cause of concern for the US economy and that was the retail sales figures.

The figures came in at -0.3 percent against expectations for a figure of 0.2 percent and are sharply lower from last month figures of 0.4 percent and clearly poses the question, is the American consumer ready for higher interest rates?

This poses a serious problem for the Fed as history shows that it’s a bad idea to lift rates on inflation figures alone as this can present other issues which pose bigger threats in the long term.

"Given the weak retail sales report alongside (the inflation data), the markets are probably going to talk about stagflation, where you are getting stronger inflation but not really getting a stronger consumer," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

If the American consumer continues to cut back on spending while the Fed is raising rates, the later may have to rethink the situation and any sudden pause in rate hikes is going to hit the US dollar hard.