How will the US dollar respond to inflation?

US inflation remains low despite the Fed's withdrawal of stimulus, but coming months could see the US dollar confound market expectations.

If markets behaved in line with theory, which they of course don’t always do, then one would have expected Friday’s positive US economic data to have triggered some upside on the US dollar. Not only was consumer sentiment at its highest since July 2013 but producer prices also reached levels not seen since the same month.

PPI turned around a -0.1 per cent result the previous month to come in at 0.5 per cent, taking the annualised number to 1.4 per cent. The chart below shows how closely linked PPI (supply-side inflation) and CPI (demand-side inflation) are.

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