US Inflation Quick Analysis: US Dollar set to reverse gains as core prices continue climbing down

One step at a time, inflation is coming down, including the stickier parts of it. The September Consumer Price Index (CPI) report carried relatively high expectations, making a miss more likely. Nevertheless, apart from US Dollar bulls, there is good news for all – contrary to the initial reaction. 

Food prices remain dear – more than compensating for a small drop in Oil prices. These volatile factors kept headline inflation elevated. The CPI rose by 0.4% MoM, above the 0.3% increase expected, while yearly price rises came out at 3.7%, as expected. Underlying prices slowed to 4.1% YoY, also meeting early projections. 

The core data is what the Federal Reserve cares about – it is the kind of prices the central bank can impact. Higher rates discourage buying home and paying higher wages, which impact the services sector. 

Without a surprise in core prices, markets reacted to the small surprise in the headline, raising rate hike expectations via higher yields. The US Dollar advanced while stocks and Gold retreated. 

However, Fed officials recently indicated that higher returns on Treasuries obviate the need for further hikes. They may repeat this stance in speeches following the release, reversing current moves. 

Moreover, the Core CPI data joins softer wage data in an otherwise robust jobs report. While Nonfarm Payrolls came out at 336,000 for September, Average Hourly Earnings increased by only 0.2%. All in all, both headline and core inflation are below interest rates, and the Fed has little need for further moves.