Inflation and the Dollar: A Changing Landscape
The recent release of the November Consumer Price Index (CPI) provided some much-needed insight into the current state of inflation in the US. After months of delayed data due to the government shutdown, the report showed that headline inflation came in at 2.7% year over year, while core inflation registered 2.6%. Although these figures were better than expected, the report was not without its limitations.
Understanding the CPI Report
The CPI report lacked the usual month-to-month changes that analysts rely on to gauge momentum, due to the missing October price data. As a result, the report provided a snapshot of the current state of inflation, rather than a clear signal of where it is heading next. This distinction is important, not just for interest rates, but for the broader implications of inflation on the US economy and its position in the global market.
Inflation and the US Economy
In 2025, inflation became part of a broader question about the US itself – whether its assets still deserve the premium they have enjoyed for over a decade. The CPI report offered little reassurance on this front, with prices for furniture, household operations, and food continuing to rise. The mix of uneven goods inflation, tariffs, and persistently elevated rents and housing costs has become familiar, and Federal Reserve Chair Jerome Powell has pointed to trade policy as a reason for inflation exceeding expectations.
The Impact on the Dollar
The dollar’s value is not always sensitive to inflation itself, but rather what inflation signals about growth, policy, credibility, governance, and predictability. Over the past decade, the US has been able to tolerate higher inflation without its currency being punished. However, in 2025, this mix began to fray, and the dollar’s value began to decline. The dollar fell about 11% against a basket of major currencies from January to June, its worst first-half performance since the early 1970s.
A Shift in Expectations
The dollar’s decline was not just about monetary policy, but about expectations. Markets began to question whether the US was still unambiguously dominant, and whether its assets still deserved the premium they had enjoyed. This shift in expectations had real consequences, with foreign investors beginning to hedge their bets and sell dollars. The scale of foreign ownership of US assets means that even small shifts in hedging behavior can generate meaningful pressure on the dollar.
A New Normal for the Dollar
The dollar’s decline has stabilized, but it has not recovered. The initial repricing of US dominance may be complete, but the old premium has not been restored. The recent inflation report did little to alter this dynamic, providing only a partial signal about the state of inflation. The question now is whether markets will complete the recalibration that began in 2025, or decide that the US remains the least risky place in the world.
What This Means for Us
A weaker dollar means more expensive foreign travel, costlier imports, and fewer bargains overall. For most households, it is a slow accumulation of costs that makes life feel just a bit more expensive. The real story is not the dollar’s decline, but what caused it – a shift in expectations about the US and its position in the global market. Whether this shift is right or wrong, it looks like the most consequential repricing of 2025.
Conclusion
The recent inflation report and the dollar’s decline are part of a larger story about the changing landscape of the US economy and its position in the global market. As investors and markets continue to navigate this new reality, one thing is clear – the US is no longer seen as unambiguously dominant, and its assets no longer enjoy the premium they once did. The implications of this shift will be felt for years to come, and it is essential to understand the underlying factors driving this change.
