The election of Trump to a new term in office puts a whole new light on US inflation data, potentially bringing the Trump effect into focus. It could be that the market simply looks past it, or it might cause renewed focus on the figures. Uncertainty often translates into increased volatility. So far, that has benefitted the dollar, but there are some indications that the gains in the greenback have run their course.
There are two important elements for context when analyzing the market reaction to the upcoming data. First is the expectation that a Trump presidency will lead to higher inflation in general. The other is Powell’s post-rate decision comments where he said that the Fed will be particularly data dependent going into December. And CPI is one of the most important data points the Fed will keep in mind. Let’s break down how each matters.
Trump, More Inflation?
The expectation for higher inflation from Trump is a bit ironic considering he ran on a platform chastising the current administration for higher prices. Nevertheless, there are two arguments made by analysts. One, higher tariffs (and yes, that includes the ones of the Biden Administration) are understood to raise consumer prices. Either by importers passing the cost on to the final buyer, or people buying from domestic alternatives that are more expensive.
The other thing is that a Trump economy is expected to grow faster, and a “hot” economy also comes along with higher consumer prices. This is the basis for why treasury yields are higher, and those elevated interest rates are supporting the dollar. Regardless of whether that’s how things will play out, that appears to be the current thinking among market makers. So, there is a chance that a lower than expected inflation reading might be dismissed by the market, as it is expected to be reversed in the coming months due to the Trump effect.
And, About that Data
Back in September, the Fed all but said that there would be a rate cut in November, and another in December. So, Powell’s comments about not providing guidance in the current environment, and saying that the Fed will look closely at the data can clearly be understood as hawkish. It implies the Fed is open to not cutting at the next meeting, depending on conditions.
Of course data plays into the decision. But, also in the coming month we will get more granularity about Trump’s priorities which could have an impact on how inflation evolves. Fiscal policy is inherently connected to monetary policy, even if the central bank tries to remain at arms length from politics.
What to look out for
Headline US CPI is expected to tick up to 2.6% from 2.4%, moving away from the Fed’s 2.0% target. However, that gain is expected to be driven primarily by temporary factors, such as higher fuel costs.
The core rate, excluding the vital but more variable elements of food and energy, is expected to be unchanged at 3.3%. Last month, the core rate ticked up one decimal for the first time in months, meaning another tick higher could usher in worries that an upward trend is forming.
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