A key inflation report will come out tomorrow at 8:30 a.m. EST for the USD. Unlike last time, expectations are that CPI will come in higher .5% suggesting a growth in inflation. This news is a big determinant in what the Fed plans to do regarding their interest rates. Here is what could happen if we see a higher and positive inflation number tomorrow.
Higher CPI = Tighter Monetary Policy
Powell has used the term "disinflation" to describe the recent slowing of the inflation number after topping out around 8% and working down to 6.5%. Keep in mind, disinflation is not the same thing as deflation. Investors saw disinflation as a light at the end of the tunnel, and an end to rising prices was a sign to start putting money back in the stock market.
However, the market will likely drop if CPI comes in higher than expected. This is because the higher rate will force the Fed to reconsider their leniency on the dollar. Should inflation rate rise, they might consider doing 50 or even 75 basis point hikes in the future.
The bar chart above is Consumer Price Index's performance since July 2022. Since then, we've seen a broader cool down in inflation growth.
Although it is hard to predict future price trends for the USD and SPX, we can use this data plus past instances to form a general conclusion. If CPI is higher than expected, the USD will probably get more attention from the Fed, and this will cause higher USD demand.
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