The inflation proves to be a short-term spike that should resolve itself as the economy returns to something like normal. No matter the inflation concern is for short or long term, dollar may find some support here since no other major central bank would have the similar concern.

Fed officials say the increase in inflation was likely driven by temporary factors related to the pandemic, including massive fiscal stimulus, supply-chain bottlenecks and a surge in demand as the economy reopens. So-called calendar effects also played a role as low inflation in April 2020, when much of the economy was shut down, dropped out of the 12-month price measure.

The annual inflation measurements are currently being affected by comparisons with the figures from last year early in the pandemic, when prices dropped steeply a demand collapsed for many goods and services during Covid-19 lockdowns. This “base effect” is expected to influence inflation readings until the summer. For example, gasoline prices soared 50% versus April 2020, though they decreased 1.4% versus March.

Last week, investors were shocked by the jump in inflation reported. The core inflation that economists tend to focus on, which strips out volatile food and energy prices, rose 0.9% month-on-month in April, an annualized rate above 11%. Bond yields duly jumped, but the 10-year Treasury yield is still below where it stood in March. There is no sign that investors expect the Fed to be anything but super-dovish.

To see why, consider one rather rosy scenario for inflation. Over the next six months, we have a smooth reduction in monthly core inflation, as supply constraints, shipping, lumber, microchips, cars, worker shortages and everything else ease, leading to consumers having less leftover stimulus to spend. By November, assume prices are rising at a modest 0.17% a month, where they need to be to reach 2% a year. In this scenario, the year-over-year rate, the one we usually look at, would peak at 5.2% next February, and still be above 3% next July.

What would the Fed do? Probably nothing. But the risk for the Fed, and for investors, is that Americans are not used to inflation like this. Core inflation has not been above 5% over a 12-month period since 1991. As a result, the Fed’s credibility might suffer a serious blow.

The Fed will explain at great length that it is a one-off inflation, will be able to point to a monthly rate coming back under control even as the year-over-year changes look bad, and will emphasize that it stands ready to intervene if inflation ever looks likely to rise uncontrollably. Perhaps, no one would worry that the Fed was allowing inflation at double or close to triple its target while rate rises remained far in the future. Perhaps, everyone would accept that lower month-on-month inflation was what mattered, not higher year-on-year inflation. Perhaps. But given how loudly those concerned about inflation are already shouting, we suspect the Fed would be besieged by calls for action.

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