US Inflation Quick Analysis: Dollar's fightback is futile, last hurrah in play

Inflation is falling – there is no doubt about it. The Core Consumer Price Index (Core CPI) has come out at 0.2% in November, even lower than 0.3% in October. On an annualized basis, November's figure represents 2.5%, far below 6% YoY. Underlying prices are clearly falling. 

While the knee-jerk reaction was the correct one – stocks jumped and the Dollar fell – the reaction is relatively limited to previous events. Why? The Federal Reserve announces its decision tomorrow.

I see this relative Dollar stnregh – EUR/USD jumped 350 pips last time, this time under 100 – as temporary. I expect the Greenback to continue falling, and not only due to these figure, but what is seen beneath. 

There are reasons to be optimistic. First, headline inflation is set to continue decline as oil prices have come under renewed pressure since the data was compiled. Once falling crude costs reach the pump, America could see another downgrade in prices.

When it comes to Core CPI, there are additional reasons to become optimistic. The unsnarling of supply chains have already pushed the prices of core goods down, but there is more in store, especially as the entire world now shifts back to services 0 even China is exiting its draconian policy. Another leg down in cookware, sports equipment and computer chips is still in the pipeline.

Another bright spot is the shelter component – or rents. Higher Fed interest rates and rising costs of other things have brought leases down, and these reach official statistics with an even bigger lag. Moving house or renegotiating a contract is an annual ritual at best. Shelter inflation – roughly 40% of CPI – is set to decline.

The Fed is aware of these two factors and will be pleased by the data. It takes it into account. The only unnerving part is services-ex-shelter, which is related to wages. That is "sticky" 0 wages do not fall that fast and the data does not provide that much comfort, at least not now.

Nevertheless, the fall in other inflationary factors will eventually drag service-sector price rises down.

That implies that any recovery in the Dollar may prove temporary. One reason to fade the upmove is the short-term wait for the Fed on Wednesday. Yet beyond the decision, this is probably the Greenback's last stand.