US Inflation Quick Analysis: Team Transitory wins, dollar loses, why the trend may extend

• US Core CPI missed estimates with 4% against 4.2% projected. 
• The theory that 2021 inflation is only transitory has received a big boost. 
• Dollar sales may be exacerbated by expectations for a delay in Fed tapering. 

What goes up must come down – and clunker prices are a prime example. Costs of used vehicles drove the surge in core inflation in recent months, as Americans emerged from lockdowns and production of new cars suffered from the global chip shortage. However, as the summer progressed, price rises went into reverse. That is one of the biggest reasons for the downbeat core inflation.

While the headline Consumer Price Index remained elevated at 5.3% YoY in August – partly a result of high fuel prices – Core CPI is down to 4%. That is below 4.2% projected and a clear shift of gears. 

The publication came eight days before the Federal Reserve announces its decision and it cements a "no-taper" announcement. Fed Chair Jerome Powell had already indicated he is in no rush to reduce the Fed's $120 billion/month bond-buying scheme in his Jackson Hole speech. Tapering may have to wait longer.

When will the world's most powerful central bank withdraw stimulus? The prospects of another delay – from November to December or perhaps only 2022 – already sent the dollar down. More greenbacks in circulation mean a weaker currency.

Will the dollar continue falling? There are good reasons to expect further falls. The CPI report piles on top of the weak jobs report for August. Moreover, the fall of core inflation is beyond one disappointing data point – it is a victory for Team Transitory. Powell and doves within and without the Fed insisted that price rises are only a temporary bump – and they are now vindicated. 

As long as the "transitory" theory of price rises takes hold, the dollar could continue its downtrend. Retail sales figures for August and consumer confidence data for September are also due out this week, and they are unlikely to change the notion of a cooldown. That is dollar negative.