Has U.S. Inflation Peaked? And What This Means For The U.S. Doller

After reaching a 40-decade high of 8.5% in March, many economists say the US consumer inflation rate has already peaked at that level after the latest print retreated to 8.3% in April.

While this offers some hope for US households and small businesses that don’t profit from price hikes, price pressures will likely continue in the near term with external issues threatening further global supply chain and inflationary risks.

April inflation cools

The United States’ April inflation reading was almost in line with the market’s consensus forecast of 8.1%. The slowdown came as energy prices fell 2.7% on a monthly basis in April, retreating from the 11% jump in March, and the first time in months that energy costs have narrowed.

The drop in energy costs can be attributed to the 6.1% decline in gasoline prices in April after surging 18.3% between February and March amid the Russia-Ukraine conflict that started on Feb. 24.

Lower fuel costs in the US in April had a domino effect on other consumer items like used cars and trucks and clothing items, which also fell on a month-over-month basis in April.

Meanwhile, the costs of food, which account for a large portion of the US consumer goods basket, inched up 0.9% in April from March, decelerating slightly from the 1% expansion the previous month.

Economists at JP Morgan said the drop in the costs of gasoline, used car, and food prices offered some signs that some of the more transitory parts of inflation are easing. However, they noted that other major commodities like natural gas and consumer services like airline fares and hotel rates rose.

Mixed views on peaking inflation

Economists are mixed on whether inflation has peaked in the US as core inflation was above market estimates, still elevated at 6.2% from 6.5% in March.

"The core was the problem, coming in hotter than expected and about double the last month. This indicates inflation may not have peaked yet. That seems to be a big concern for the market. In response to that futures sold off and continue to sell off,” Robert Pavlik, senior portfolio manager at Dakota Wealth, was quoted by Reuters as saying.

Some don’t expect inflation to decelerate significantly until the spring, while others say inflation has already peaked, although oil and grain prices are still predicted to increase but only at a minimal rate.

Inflation elsewhere not peaking

Still, global inflation is on the rise as the war in Ukraine drags on and as the latest COVID-19 developments, particularly in China, threatens an unprecedented supply-chain disruption that could have global implications.

In China, the world’s second largest economy, consumer inflation zoomed to a five-month high of 2.1%, faster than market estimates, as the COVID-19 lockdown hammered supply.

Fitch Ratings last week warned that the lockdown in Shanghai will exacerbate global supply-chain pressures and inflation concerns. Shanghai accounts for a fifth of China’s port volume, while China accounts for 15% of global merchandise exports.

In the Eurozone, headline inflation hit a record high for the sixth consecutive month in April at 7.5%, according to early estimates from the 19-member region’s statistics office. The region is among the hardest hit by the war in Ukraine as European nations mostly source their natural gas from Russia.

Looming rate hike

The US Federal Reserve is poised to bring in aggressive rate hikes in the coming months including at the upcoming June meeting when economists are expecting around a 75 basis-point increase before reverting back to a 25bp hike from November onwards.

"Even with this Fed action and hopefully some improvements in the supply side story we have doubts that CPI will get back to 2% target before the end of 2023,” ING Bank’s chief international economist James Knightley said in a note last week.

What does this mean for the USD?

The US dollar Index (DXY), which tracks the dollar against six other currencies, reached a fresh 20-year high on Friday the 13th, two days after the CPI data was released.

The strong USD allows the Fed to continue its aggressive rate hike and in turn keep inflation from rising further.

A strong dollar would also lower import costs, improving the profit margins of businesses without having to raise prices for consumers.