US: Upside Core CPI surprise to lead the USD higher again – Credit Suisse

The main focus is still on tomorrow’s US Consumer Price Index (CPI) report. If Core inflation beats expectations, the US Dollar could edge higher again, economists at Credit Suisse report.

Core goods inflation to be close to flat

“We are looking for core goods inflation to be close to flat as it was last month while expecting core inflation to rise 0.4% m/m and headline inflation to rise 0.5% MoM, modestly below consensus. Improved supply chains and weaker demand likely play a role on this front. We also expect recent hot points like transportation services and health insurance to ease substantially.”

“The problem from our strategy perspective remains that it does not appear quite so clear to us that headline inflation will decline materially given high food and energy prices, while we are also unconvinced that shelter inflation is slowing quickly.”

“The worst-case outcome for markets would be core inflation that beats expectations not due to shelter (which can easily be written off as lagging), but instead a broad set of fast-rising prices across different categories. Given that expectations for a 75 bps Fed hike next month are already largely priced out, there is a risk that such a surprise would prompt the market to price at least a 50% chance of that outcome again, which would both upset asset prices and lead the USD higher again.”