No. Nobody Cares About January’s ‘Hot’ Inflation Prints

“CPI prints high but does anyone care?”, wondered Bloomberg’s Cameron Crise who, unless I’m just getting the wrong impression, is not a fan of mine.

For what it’s worth, the answer is no. Nobody cares that CPI printed 2.5% on the headline, the highest since October of 2018.

Core for January was 2.3%, hotter than the expected 2.2%, and nobody cares about that either.

There are several reasons nobody is particularly interested in this right now.

First, the virus scare means any upward pressure on yields from hotter-than-expected CPI prints would be muted anyway, as the safe-haven bid and attendant growth concerns make 2% on 10s appear as an imposing, Everest-like peak, unreachable in the near-term.

Second, the data has become less relevant. The Fed has obviously gone out of its way to parrot the “good place” characterization of monetary policy, and beneath that (thin) veneer of confidence is an asymmetric reaction function skewed heavily towards dovishness. The bar for more cuts is infinitely lower than the bar for hikes, and the whole purpose of the Fed’s policy rethink is to conjure credibility on the inflation front. Overshoots are welcome.

“The market response to the CPI release may be more muted than normal [which] is a function of two things”, BMO wrote, in a Thursday note. They continued: “First, price discovery has largely moved beyond data dependency, mirroring the Fed’s ‘wait and see’ approach to the rate path, and second, any information coming out has a stale element due to the confounding coronavirus factor”.

Finally, as discussed at length on Wednesday in “How It Could All Dead End“, the Fed is up against a potentially pernicious dynamic, whereby persistent outperformance from the US economy supports the dollar, which then imports disinflation.

The tragic irony in that equation is that if Fed cuts succeed in bolstering the domestic economy but have a muted effect on inflation due to the flat price Phillips curve, those cuts (to the extent they exacerbate the economic divide between the US and the rest of the world) could complicate things further.

So, no. Nobody cares about January’s “hot” YoY inflation print.