US inflation? Only if the Fed says so, why every dollar rise could be a selling opportunity

• US inflation figures point higher and would warrant a rate hike in normal times. 
• The Federal Reserve remains (almost) perfectly unified in dismissing higher prices.
• The dollar has room to fall if shortages self-resolve.

It's the Fed stupid – paraphrasing the old political wisdom from the 1990s, there is no other force that moves the dollar more than comments from the central bank. And, for the Federal Reserve, do economic indicators matter? The answer is "it depends." 

The ISM Manufacturing Purchasing Managers' Index was the latest report to include concerns about rising prices and shortages, with the Prices Paid component remaining near record highs at 88 points. This survey – or "soft data" – for May comes on top of "hard data" from April. The Core Personal Consumption Expenditure (Core PCE) shot up to 3.1%, smashing expectations.

Core PCE is the Fed's preferred gauge of inflation, yet the bank did not budge. Randal Quarles, a Governor at the Fed, said that his institution should not use its tools to address supply chain issues. Moreover, he repeated the Fed's mantra that inflation is still transitory.

Similar to that ISM figure in being only the latest to show inflation, Quarles is only the latest speaker to ignore it. Fed Chair Jerome Powell, the bank's governors and almost all the regional bank presidents back that view, and that weighs on heavily on the dollar. 

Dallas Fed President Robert Kaplan stands out in calling for a debate on tapering bond-buys from the current level of $120 billion/month. However, while he remains in the minority, fresh greenbacks are electronically printed and the pressure continues. 

What is next? There is speculation in markets that the Fed would use its June meeting to say that it will begin talking about tapering in one of the next few meetings, before a formal announcement later in the summer and implementation in early 2022. If the evidence continues mounting, perhaps the Fed will have no choice. 

However, there is a different scenario – supply appears to meet demand, shortages trim down and prices pressures also dissipate. That would be a vindication for the Fed's patient approach. How likely is that?

There is no clear answer, but it seems that markets are shifting away from following the data and only listening to the Fed. The dollar will likely remain on the back foot as long as the bank ignores such figures.

In that case, it would be wise to sell any surge in the dollar that is a response to signs of higher inflation – as such a move would prove temporary.