Muchado About US CPI

US inflation came in almost exactly to expectations.

There was a great deal of headline fanfare about inflation being better than expected? These are surveys only and with significant margins of error. So headline inflation at 3.2%, instead of the market expectation of 3.3%, is noteworthy, but not shockingly positive. As some wanted to make out.

US CPI

Headline Inflation still accelerated from 3.0% to 3.2%. Core Inflation just nudged a little lower from 4.8% to 4.7% The Federal Reserve wants to see a sharp drop and sustained trend lower in core inflation that it just isn’t getting at the moment. These numbers only cemented the tightening bias of the Federal Reserve.

Core inflation remains stubbornly high.

For the month, both headline and core inflation were steady at 0.2%. This is more encouraging, but again there are pipeline price pressures still in the system. With a potential inflation surge globally possible, a very real risk, given the volatility and recent gains in some energy and food markets of late.

It is also great news that headline inflation is stabilising in the vicinity of that magical 3% level. There will however be serious concern about the core number remaining so extreme and stubbornly near its peak.

Markets initially had an overly positive reaction to the data, before realising that really nothing much had changed., CPI still accelerated, and therefore the Fed will maintain a tightening bias. This point was further emphasised by Fed President Daly, who said rates would stay restrictive for longer. The run of Fed speak of the past week has if anything been ratcheting up in its hawkishness.

This, we already knew. Our forecast remains for the Federal Reserve to stay on hold for a very long12-18 month period. The market though, seems to be in a state of repetitive surprise to any such Fed speak. This error by the market is of course in perfect keeping with how wrong ‘market expectations’ on the Fed Funds Rate have been for the past two years.

Remember inflation would be ‘transitory’. That rates would quickly reverse and be cut aggressively a year ago, the famous non-event of a ‘pivot’. Wall Street traders the world over have failed to understand the simple truth that interests rates at these levels are not an aberration. They are indeed the new permanent normal.

This was always going to be the case. The aberration was rates being so low for so long even when both the health and economic crises had passed. It is not difficult to see that rates near 2%, let alone 1% and zero% were the aberration. This is getting back to normal and it is something the market is going to have to learn to live with.

In the end the market finished the day quite heavily. Retracing all of those mis-placed initial CPI gains. Overall, the market is trying very hard to stabilise around current levels, but I can feel the longs waiting for further profit are becoming increasingly frustrated.

At some point, the squaring up of those positions is a very real downside risk.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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