The week in review
- Headline CPI: 0.1% m/m, 8.3% y/y
- Core CPI: 0.6% m/m, 6.3% y/y
- Retail sales/ex-auto: 0.3%/-0.3% m/m
The week ahead
- Housing Starts
- FOMC meeting
- Flash PMIs
Though tof the week
By the end of the summer, investors had adopted a view that inflation would decelerate at a healthy pace into the end of the year. While headline CPI did decelerate to 8.3% y/y in August on the back of a 5% decline in energy prices, the report disappointed on a month-over-month basis as inflation rose 0.1% m/m versus expectations for a sequential decline. While some of the disappointment in the headline figure stemmed from food prices rising 0.8% during the month, the core figures were a bit unsettling, rising 0.6% in August and 6.3% y/y. In the details, inflation in core services outpaced inflation in core goods, and shelter costs continued to move higher. Despite this disappointing report, we see reason to expect that prices will continue to cool in the coming months. As shown in this week’s chart, food, energy and other commodities prices had been growing faster than the headline number itself but are finally starting to come down. This is key, as together these items account for 40% of the CPI basket. Looking ahead, we expect commodity disinflation to spill over to other categories. This notion was reinforced by the 0.1% m/m decline in producer prices, which should eventually feed into lower CPI. Futures markets responded to the inflation release by fully pricing in a 75bp rate hike at the Fed’s meeting this week, with some financial participants even positioning for a full 1% rate hike. We expect the Fed will deliver 75bp of tightening this month and continue hiking into the end of 2022.
Fundamentally, this inflation report creates more uncertainty around the trajectory of rates, and that wider distribution of outcomes will continue as a source of indigestion for risk assets until there is more clarity on the broader direction of inflation.
