Inflation Comes In Hot For Second Month As Markets Appraise Fed’s Policy Shift

You might recall that core inflation rose the most since 1991 in July, an anomalous print for the anomalous times in which we live and trade.

The market is still dealing with pandemic distortions as evidenced by unprecedented volatility in the MoM core series, which isn’t exactly known for being the wild EKG it’s been over the past six months. March, April, and May, for example, marked an unprecedented three-month streak in negative territory, setting up June’s bounce and July’s surge.

With that in mind, both core and headline inflation came in ahead of expectations for August. CPI rose 0.4% MoM and 1.3% YoY.

The core prints are 0.4% and 1.7%. All of these figures are hotter than expected.

You’ll note that the MoM core print is double consensus, which was looking for a 0.2% gain. July’s print was triple estimates.

Apparently, used cars were the main “culprit”, if that’s the right word.

“The sharp rise in the index for used cars and trucks accounted for over 40% of the increase; the indexes for shelter, recreation, household furnishings and operations, apparel, motor vehicle insurance, and airline fares also rose”, the BLS said. Indexes for education and personal care were among only a handful that declined.

Food at home prices posted a second straight monthly decline, which is at least good news for families who witnessed the sharpest rise in grocery bills in decades during the worst days of the pandemic. Prices are still up over the last year.

“The August decline was mostly caused by the index for meats, poultry, fish, and eggs, which fell 1.7% in August, its second consecutive monthly decline after sharp increases in prior months”, the color that accompanies the release reads. “The beef index fell 4.4% in August after declining 8.2% in July”. Earlier this year, Americans panicked when coronavirus outbreaks at meatpacking plants threatened to drive up prices for steak and pork. (Oh the humanity.)

With the inauguration of the Fed’s revised policy framework (i.e., average inflation targeting) “hot” prints going forward will be viewed not just in the context of exploding deficits and the ostensibly inflationary implications of monetizing them via QE (never mind that QE hasn’t produced any inflation for a decade), but also in light of an FOMC that is actively trying to stoke above-target inflation to “make up” for previous shortfalls.

“Any evidence that the extraordinary amount of monetary policy accommodation in the system has accelerated pricing pressures beyond the typical +0.2% pace will offer an opportunity to gauge the market’s response function to inflation in the context of the Fed’s new framework”, BMO’s Ian Lyngen, Jon Hill, and Ben Jeffery wrote Friday morning.

That’s a good, concise assessment. Of course, it’s still far too early to suggest that things are getting “too hot”, even as consumers are somewhat concerned.