US Inflation Analysis: As high as it gets? Fed may still stick to “transitory” stance, dollar could suffer

  • US headline inflation hit 5% in May, more than 4.7% expected. 
  • Prices of used cars and airfares were among the upside drivers. 
  • The Fed may still see through these reopening struggles and refrain from any major change.

Highest since August 2008 – at 5% YoY headline US Consumer Prices Index has not only beaten expectations but also causes jitters in markets. Core CPI, which excluded volatile food and energy figures, rose by 3.8% yearly, also above estimates and substantially beyond the Federal Reserve's 2% target. 

Time to taper bond-buying and raise rates? That is the main question for the Fed, which is watching these figures closely ahead of next week's decision. If the economy is overheating, the central bank would raise rates.

However, the Fed's stance is that inflation is only "transitory" and that is divided into two parts. First, the high year-over-year increases are partially due to base effects – prices tumbled last year. That is a known fact to all and well anticipated. 

The second reason for the quick monthly price rises – 0.6% in headline CPI and 0.7% on the core – stems from the rapid reopening, which is causing shortages and therefore price pressures. Is this temporary or not?

Diving into the details, there is reason to believe the Fed's stance accurately, at least for now. Americans are on the move once again in response to the successful vaccination campaign. Once again, prices of used cars have shot higher, and so have airfares. There are not enough clunkers nor flights to satisfy the instant surge in demand. As people go out, they are also buying new clothes, pushing apparel higher. 

Prices of home improvement products – which were on the rise in response to lockdowns – have yet to drop as American still has significant amounts of additional cash in their pockets. 

Markets expect a rate hike to come only around this time in 2023 – two years from now – so tapering of bond buys may wait for some time in 2022. Those expecting a preannouncement of a reduction in the bank's current purchase pace of $120 billion/month may be disappointed. 

The furthest the Fed could go is something along the lines of "the time will come to think about thinking of raising rates" or something along these lines. The thinnest of hints of tapering means only a meager upside bump in the dollar. Conversely, the greenback could drop if the Fed sees through the data. That is the most likely scenario. 

More European Central Bank Preview: Why June's decision presents a buy the dip opportunity


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD looks depressed below 1.2200 ahead of ECB, US inflation

EUR/USD remains on the back foot below 1.2200 ahead of a busy docket. The US dollar shrugs off weaker Treasury yields. The ECB eyed for economic outlook. The US CPI needs stronger-than-forecast print to keep the dollar afloat.


GBP/USD bounces off 1.41, shrugging off strong US CPI

GBP/USD has been extending its recovery above 1.41. The dollar is unable to take advantage of robust US inflation figures. Headline CPI jumped to 5% YoY, above 4.7% expected. 


XAU/USD off lows, not out of the woods yet

Gold remains pressured for third consecutive day as sellers attack weekly bottom. Treasury yields stays offered but King dollar stays firmer. 

Gold News

Three reasons why Shiba Inu price may be ready to rally

Shiba Inu price decline has not been matched by increasing volume, suggesting it is not token specific. ShibaSwap decentralized cryptocurrency exchange (DEX) in testing mode, to be released to the public soon.

Read more

GameStop Corp trades flat ahead of its annual shareholder meeting

NYSE:GME gained 0.85% amidst an unsettled day for the broader markets. GameStop announces a corporate shakeup that sees Ryan Cohen takeover as Chairman of the Board.

Read more