US Inflation Quick Analysis: Dollar selling opportunity? Fed could shrug off clunker-driven CPI

• The US has reported a 5.4% headline increase, higher than expected
• One-third of increases are due to a 10.5% leap in costs of used cars.
• The dollar's leap could prove temporary, also due to other factors.

Cash for clunkers – 10.5% more cash than one year ago, and that is the main driver behind accelerating US inflation. Had prices of used cars remained unchanged, the headline Consumer Price Index would be roughly 3.6%, not 5.4% as reported. Core CPI would also be substantially lower than the 4.5% YoY reported for June. 

Why are second-hand vehicle prices on the rise? Americans have spare cash saved during the pandemic and boosted with stimulus checks. More importantly, they are able to drive much more than beforehand as the economy reopens. Some prefer buying new cars, but these are often out of reach due to the global chip shortage. The fast reopening has boosted prices – transitory inflation.

However, markets move first, ask questions later. The dollar has reacted with a knee-jerk reaction to the upside, but bond markets seem relaxed, with 10-year Treasury yields hardly moving at 1.37%. This could prove as an early sign that markets are having a rethink – but they also await the testimony by Federal Reserve Chair Jerome Powell on Wednesday. 

Apart from clunkers, higher CPI was also driven by surging costs of hotel stays, car rentals, airfares, and also apparel – which was in low demand while many worked from their home offices with pajamas. 

These explanations may sound like excuses to those fearing that the mix of monetary and fiscal stimulus has gone too far and is set to trigger uncontrollable inflation. How long can doubters make excuses? Fed Vice Chair Richard Clarida said that if prices pressures persist through year-end, he would have to dismiss the theory of transitory inflation. However, that could come sooner.

Apart from Powell's upcoming testimony, another quicker development is the spread of the Delta COVID-19 variant. After falling sharply, US infections have nearly doubled in the past two weeks. If cases continue rising quickly – as they have in the UK – it could serve as a headwind to the reopening. Lockdowns are unnecessary to cool down inflation. 

Overall, this inflation-induced dollar surge may prove temporary – despite the current surge. 

See Delta Doom is set to storm America, the dollar could emerge as top dog