Unpacking the Latest US CPI Data: Impact on Fed Policy and USD Exchange Rates - Insights from Paweł Majtkowski, eToro Market Analyst

In Conversation with Paweł Majtkowski: Deciphering the Recent US CPI Surge and Its Implications for Fed Policy and the USD.

FXMAG: How would you comment on the CPI reading from the US? Can it somehow affect Fed policy and USD quotes?

U.S. inflation rose for the first time after 13 months of declines. However, this was not a surprise, as the markets had expected such a scenario. In the end, inflation came in at 3.2% y/y, 0.1 pp. lower than market expectations. Inflation in the U.S. rose, as it is mainly a statistical base effect. Inflation peaked in 2022 and there is currently no return to such inflation readings. 

It's worth noting that services inflation (excluding rents), which analysts and the Fed have been watching the most recently, has been at around 3 percent all along. It is the rise in services prices that the Fed has been most keen to bring down recently. Therefore, the current rise in CPI inflation should not translate into further interest rate hikes. It seems that all along the most likely scenario is a pause and the first rate cuts in the first half of 2024. Inflation may still rise in the following months, but it will no longer be out of the Fed's control. 

But of course, the battle against inflation has not yet been definitively won, and stubborn and prolonged inflation at 3-4% could be disruptive to the economy, and in the long run distort the way we think about our money. This reading may also temporarily strengthen the dollar, but this effect is unlikely to be long-lasting.

 

Paweł Majtkowski, eToro Market Analyst