Underlying US inflation drops amid concerns on Trump inflationary pressures

Matthew Ryan, CFA Ebury

The December US inflation report delivered some conflicting news for markets.

On the one hand, the main measure of consumer prices continues to trend upwards, rising to its highest level since July. Yet, we also received some rare positive news on underlying inflation, which unexpectedly dropped at the end of last year following the smallest increase in monthly core prices since July.

Investors have latched onto the latter, and used it as justification for sending the US dollar lower, while also piling into Treasuries - the 10-year yield has dropped almost 15 basis points for the day.

FOMC officials will no doubt welcome today’s developments, although we are still not convinced that the Fed will be in a hurry to cut interest rates again any time soon.

Concerns surrounding the inflationary implication of Trump’s tariffs, in particular, continue to loom large, and until we get more concrete details on these plans we could see the Fed sitting on the sidelines.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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