US Inflation Analysis: Fed may fade fears of overheating, dollar selling opportunity?

• US inflation figures have smashed expectations and points to an overheating economy.  
• Stocks have tumbled and the dollar has responded positively in a knee-jerk reaction.
• The Federal Reserve may still see through these figures and turn the trend around.

Rearing its ugly head – headline inflation has leaped to 4.2% annual in April while core prices have surged by 3% YoY, both far above expected. The Consumer Price Index figures are in line with other robust statistics for last month, and end the confusion related to the weak Nonfarm Payrolls. That NFP was probably the outlier.

Nevertheless, similar to the response to the jobs data, markets responded forcefully, this time sending the dollar higher and stocks down. Investors assess that the Federal Reserve will be forced to begin tapering its bond buys sooner rather than later, ahead of the inevitable rate hike. Will the Fed take that path?

No fewer than five Fed officials appeared on Tuesday, repeating the bank’s message that inflation is transitory and that the economy has a long way to go. Were they shocked by the data or did were they aware and decide to stick with the script anyway?

Vice-Chair Richard Clarida and Atlanta Fed President Raphael Bostic are set to speak on Wednesday. They may provide updated insights and may change markets’ course. The alternative narrative of rising inflation is that this move is still temporary. Apart from well-known base effects – CPI tumbled this time last year due to covid – bottlenecks such as the global chip shortage and the quick reopening could be behind the move. That could cool down as supply meets demand.

Overall, there is room for the trend to switch – an upswing in shares and a fresh fall for the dollar.