US CPI Quick Analysis: A slow step for disinflation, a big blow for the US Dollar

Game over for inflation – that is what investors want to declare, even as price rises remain uncomfortably high. Optimism is set to boost stocks and weigh on the US Dollar for some time.

The US reported a monthly increase of 0.3% in the Core Consumer Price Index (Core CPI) in December, as expected. But, that is an annualized rate of 3.6%. In addition, Core CPI YoY came out at 3.9%, above the 3.8% expected, while headline CPI came out at 0.3% MoM and 3.4% YoY, both above expectations. 

Does the mostly stronger-than-expected data imply a surge for the US Dollar and a melting of Gold and stocks? Not so fast.

First, Core CPI YoY still declined to 3.9% – it is improving, just slower than expected. Secondly, as mentioned, markets seem eager to see inflation falling, and the data needs to be a shocker to change that view. 

Will the Federal Reserve (Fed) cut rates in its March meeting? There are two more CPI reports and a couple of Nonfarm Payrolls releases until that meeting. In between, the bank has another rate decision in late January – and plenty of opportunities to speak out. 

I expect officials to push back against the notion that borrowing costs will fall around the equinox. They dislike market euphoria and especially the rapid fall of long-term interest rates, reflected in Treasury yields. Inflation could still rear its ugly head if borrowers and consumers remain giddy. 

Nevertheless, each hawkish pushback by the central bank will likely receive a mere token nod by investors, a dip before the next risk-on move. All in all, the mix of some proof of falling prices and rosy glasses is set to down the US Dollar, while sending stocks and Gold higher.