Wednesday, October 13, 2021
The characterization of inflation as ”transitory” by Federal Reserve (Fed) Chair Jerome Powell—which has been the subject of debate for months—is likely to come under renewed pressure after the most recent inflation data release.
The Bureau of Labor Statistics released the September Consumer Price Index (CPI) data this morning, showing headline CPI climbed 0.4% month-over-month vs. estimates of 0.3%, while core CPI rose 0.2% month-over-month as expected. Base effects from rolling off weak numbers a year earlier meant the year-over-year numbers were larger, but we find more usefulness in the monthly numbers until we get past the weak comparisons versus a year ago.
The composition of the data is what has our attention. The well-chronicled rise in energy prices, as well as a jump in food prices in part due to Hurricane Ida, led to the divergence between headline and core (excludes food and energy) CPI. But the 0.2% core CPI number is not as benign as it looks. We have consistently flagged rents as a major tell on the ”stickiness” of inflation and until this month rent measures had remained relatively contained. September, though, marked the first month that rents burst through the previous ceiling of roughly 0.3%, posting monthly advances in excess of 0.4%.
“Price increases in rents certainly caught the eye of the market,” said LPL Financial Chief Market Strategist Ryan Detrick. “While we always caution against reading too far into one data point, this divergence potentially represents a major challenge to the ‘transitory’ inflation argument if we see similar trends in the next couple reports.”
Another major takeaway from the report is a second straight monthly decline in supply-constrained, reopening-levered segments of the economy that had been surging over the summer. These relatively smaller parts of the overall CPI basket were driving an outsized portion of the advance this summer. Used cars and trucks, airfare, and lodging away from home all declined month over month. While this certainly fits with a reversion to the mean theme, as well as the transitory inflation argument, the move lower coincided with a resurgent Delta variant that has dampened demand. Whether these CPI components will see renewed strength once this latest COVID-19 wave abates remains an open question.
As seen in the LPL Chart of the Day, used car and truck prices have experienced a drop-off after the summer surge, which saw them become the poster child for bottleneck-driven inflation from semiconductor shortages.
Gauging the Fed’s reaction function to inflation and jobs data is fast becoming the market’s primary focus. The early market reaction to the report seems to indicate that market participants believe this keeps the timeline for tapering asset purchases intact, which should be announced at the next Fed meeting. We still see rate increases beginning in early 2023 even though markets are pricing in “liftoff” for late next year.
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