Markets Remain Uncertain After Unexpected Inflation Numbers

Markets Remain Uncertain After Unexpected Inflation Numbers

September 16, 2022

From the desk of Vance Howard:

The markets sold off hard on Tuesday, with the CPI data being hot. The September CPI reflecting August 2022 inflation data came in at 8.3%, which was higher than the consensus forecast but lower than the two previous readings. A 75-bp rate hike from the Fed is almost certain for September, and rates are likely to reach the 4% range by EOY 2022. This will cause a lot of volatility over the next two to three weeks. We are holding a large cash position, but opportunities are few and far between.

The Consumer price Index or CPI is a measure of the weighted average change over time in the price of a fixed basket of goods commonly purchased by U.S. consumers. The CPI is the most widely followed measure of U.S. inflation and is calculated by the Bureau of Labor Statistics, or BLS.

The Consumer Price Index (CPI) ticked up 0.1% in August, contrary to the consensus of -0.1%. While energy prices declined 5.0%, down for the second consecutive month, that was insufficient to offset the increases in most other categories. Even in energy, the decline was only in gasoline prices, while electricity and natural gas prices rose. Food prices advanced 0.8%, the least this year, but nearly four times the average monthly gain since 1990. Core CPI, which excludes energy and food, increased 0.6%, twice the gain in the previous month, and above the 12-month average of 0.5%. The consensus was for a steady 0.3% gain in the core.

The biggest driver of the monthly change in the core CPI was shelter, which has a weight of over 40% in that index. Rent and owners’ equivalent rent (OER) each rose 0.7%, which for OER was the biggest gain since June 1990. Despite the decline in housing market activity this year, softer home prices are reflected in the CPI with a significant lag, and will remain a source of higher inflation this year. Medical care services prices jumped 0.8%, the most since October 2019, led by hospital services. Household furnishings and operations climbed 1.0%, the most since January. New vehicle prices rose 0.8%, picking up from the prior month’s 0.6% gain. There was a partial offset from modest declines in the prices for used cars and trucks (-0.1%), communications (-0.2%), and airline fares (-4.6%).

On a y/y basis, the CPI eased only slightly to 8.3% from 8.5% in the month before, missing the consensus of 8.0%. Notably, food prices surged 11.4% from a year ago, the steepest rise since May 1979. Food at home prices jumped an even bigger 13.5% y/y, also the most since 1979. Core CPI climbed 6.3% y/y, above the consensus of 6.0%. Because of base effects, a 0.3% monthly increase in the core CPI in September would be sufficient to lift the y/y change to match its cycle high from earlier this year. If this were to materialize, it will strengthen the case for continued aggressive Fed tightening in upcoming policy meetings.

Vance Howard

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