Resilient Inflation Could Extend the Dollar Bounce

Red Hot Inflation Data Could Empower USD Bulls

This remains arguably the most important data point on the calendar with both policymakers and traders fixated on elevated price pressures. Although the downtrend from the June peak of 9.1% is expected to continue, the pace of the decline may stall and bolster thoughts of higher prices for longer. This kind of “sticky” inflation, with the dreaded entrenched feel potentially not far behind would rock risk markets and boost the greenback.

The consensus forecast for the annual headline print of 6.2% would be the slowest gauge of inflation since October 2021. But it would represent the smallest drop from the prior month since September, owing to higher petrol prices. Core inflation is also seen falling to 5.5% y/y in January from 5.7% previously, though stronger used car prices and rents are forecast. These two heavyweight components are key to prices dropping strongly through this year.

There is some added uncertainty over the data this month as the BLS, the government US statistics gurus, are bringing a change to its methodology in order to calculate the inflation numbers. Some economists believe that the new weights, which will be adjusted annually rather than every other year, could mean an upward push to inflation. For example, the average core CPI for the last three months of 2022 rose from 3.1% to 4.3% with the new seasonal factors released by the BLS.

Data to Reinforce Hawkish Rhetoric?

Recently, Chair Powell took a rather more dovish tone than many expected at the FOMC meeting and a speech a week later when he said the disinflationary process had begun. The Fed is of course focused on the speed of the fall in inflation as this will guide how much further policymakers will carry on raising rates. There is currently a high chance of one more 25bp rate hike at the FOMC’s next meeting in March.

A bigger than expected slowing in CPI may take some heat out of the hawkish repricing markets have seen following the blowout non-farm payrolls data at the start of the month. A chorus of Fed officials have consistently stuck to the mantra of the need for higher rates for longer.

Key an Eye on the Core Reading…

But a higher monthly core reading could give the hawks the chance to cement at least another rate rise in May, which could then push the terminal Fed funds rate towards and beyond 5.25%. If the tight labour market continues, price pressures may stay sticky and force the Fed’s hand. That means the market potentially prices out any pivot toward easing this year and fuels another leg higher in the dollar. An outsized hotter report could also trigger a Valentine’s Day massacre in risk markets with the Nasdaq getting hurt. latter could mean a sooner-than-expected end to the bank’s tightening cycle and likely weigh on GBP.

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