US Inflation Analysis: It is peak inflation only until the Fed’s verdict, stock rally at risk

• US inflation has finally come down, on all measures. 
• Stocks are up and the dollar is down in the immediate reaction.
• Fed officials will likely clarify the fight against inflation continues. 
• The current moves could reverse sharply. 

The fog around peak inflation has cleared – at least until the Federal Reserve announces its verdict. The US Consumer Price Index (CPI) report showed a considerable moderation in inflation, Core CPI rose by only 0.3% in July, significantly less than 0.5% expected. On a yearly basis, it stayed at 5.9% – cresting.

With headline inflation, it seems the peak is behind us. Prices remained unchanged in July, and yearly inflation decelerated from 9.1% to 8.5%. That is a relief for the Fed and for the White House. 

For stocks, this report and the recent Nonfarm Payrolls report – a leap of 528,000 jobs in July – are golden. Lower price pressure mean a lower path of interest rate rises, and higher employment mean more sales for companies. 

The dollar tumbled down across the board, amid expectations for the Federal Reserve to raise rates by only 0.50% in September and to begin cutting them at some point next year. 

However, there is one thing that matters more than inflation data. No, it is not the NFP, but rather what the Fed says about inflation data. I think that the central bank will continue its battle to crush inflation and refrain from declaring victory.

Why? First, shelter prices continue rising, and they take more time to fall. Secondly, this is only report – and prices could rill rise again. Third, the Fed still has one more CPI report until its September 21 meeting. 

The current party in stock markets and the downfall in the dollar may suffer profit-taking once Fed officials speak up. They will undoubtedly acknowledge the improvement – they cannot deny reality – but without a party from Fed officials, the party in stock market will suffer a pause. For the dollar, it should trigger a short squeeze of the current massive sell-off.