The US dollar dropped on Wednesday following US inflation data. The numbers came in near expectations but still triggered a rally in US bonds. According to analysts at Wells Fargo, the details of the report favored the view that the recent degree of inflation will not last, as prices in categories most closely associated with the economy's reopening and supply constraints have begun to ease. However, they warn there was also evidence that price pressures continue to broaden out.
Key Quotes:
“Consumer prices rose 0.5% in July, cooling from June's scorcher of a 0.9% gain. The moderation is a sign that the most acute frictions associated with the economy's reopening are beginning to ease. However, the transition is far from over yet and price pressures have broadened out, which should keep inflation running noticeably above the Fed's target for a while.”
“The smaller rise in prices in July can be traced in part to a marked slowdown in used car prices. Used car prices were essentially unchanged (+0.2%) after increasing 7% or more and accounting for at least one-third of the headline's gain in each of the prior three months. Prices for new cars, however, got another big lift (+1.7%), as the used car market is not offering the affordable alternatives it once used to and inventories remain exceptionally low.”
“Until transportation costs ease up and inventories are replenished, there will be little relief for inflation. Without a marked pickup in productivity, stronger wages will also exert upward pressure on inflation until labor constraints ease. We expect headline CPI to remain around a year-ago pace of 5% through Q1 of next year.”
“The increasingly long period of above-target inflation no doubt has some Fed officials getting increasingly uncomfortable with the current stance of policy. However, others, including Chair Powell, have not wavered in the view that price growth will eventually cool off. This group will take comfort from today's report in addition to inflation expectations remaining well-within their historic range. While FOMC members seem to agree that the inflation portion of their “substantial further progress” criteria for tapering has been met, the fact that inflation expectations remain fairly well-behaved gives them some time to get on the same page about the labor market.”