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Inflation & US Dollar

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Inflation: Gone before you know it
Inflation remained contained. The core PCE price index, the Fed’s elected measure was at 1.9% in October having touched but not broken 2% four times during the year. The 12 month moving average was at 1.83% in October the highest it has been since early 2013. Overall PCE inflation moved to 2.3% for three months in the middle of the year largely on oil prices as West Texas Intermediate traded above $74 a barrel in July and then topped at $76.41 on October 3rd. By September and October inflation was back to 2% and set to move lower. Oil prices fell steeply from that October peak down 38% to $47.41 on December 18th.

US Dollar: Luck is as good as being right
The dollar’s strength in the second half of 2018 was based on the Fed’s interest rate policy and the self-inflicted wounds of the euro and the sterling. Risk aversion played to the dollar’s safe haven status and the risks posed by Brexit and the various political and economic problems of the EU. Political considerations allied with fading economic growth make it highly unlikely that the ECB would move from its accommodative policy even after it ends bond purchases in December.  The dollar will begin the New Year on the upbeat with the Fed moderating its rate policy but still tightening and the euro facing  two quarters of Brexit turmoil.


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