US consumer prices rose more than expected in September, data out Wednesday showed, but the figures fell short of validating dour prognostications.
Headline CPI rose 0.4% last month, matching the top-end of the range. Economists were looking for a 0.3% MoM gain.
Prices rose 5.4% YoY (figure below) versus an expected 5.3% increase. The situation isn’t getting much better, but it doesn’t appear to be getting materially worse either.
Note that the YoY core print was steady at 4%. That was in-line with estimates.
I scarcely need to regale readers with the context. Market participants are obsessed with inflation and, more recently, the prospect of a transition to a stagflationary environment in the quarters ahead.
The latest consumer survey from The New York Fed showed both near- and medium-term inflation expectations continued to make new series highs last month (note: the series only goes back to 2013).
The Fed is in a bind. They can tighten policy to preempt further price pressures at the risk of exacerbating a burgeoning slowdown, or keep policy ultra accommodative in perpetuity at the risk of igniting dry kindling.
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Team “transitory” scored a small victory last month, when August’s numbers showed core prices increased much slower than expected.
Still, PCE prices ran the hottest in three decades for a third month in August, underscoring the extent to which “transitory” is becoming a relative term.
According to Raphael Bostic, “transitory” is now a “dirty word” when it comes to debating the timeline on inflation moderation. He made the remark Tuesday at a virtual speech to the Peterson Institute. As Bloomberg recounted, “he spoke with a glass jar labeled ‘transitory’ at his side, depositing $1 each time he used the ‘swear word,’ as it’s become known to him and his staff over the past few months.”
You could argue September’s numbers were yet another “check in the transitory column,” to quote BMO’s US rates team. Core prices rose an as-expected 0.2% MoM (figure below).
Between that and the in-line YoY print on core, policymakers (and Democratic lawmakers pushing the White House’s fiscal agenda) are likely to feel at least a bit relieved, although no one in the “transitory” camp will be able to claim vindication anytime soon. I’d also note that the MoM core print was just barely below the round-up threshold.
The breakdown showed the shelter index rising, along with the indexes for new vehicles and household furnishings, while gauges of airline fares, apparel and used cars all declined over the month.
The food at home index rose sharply (figure below), as did the broad food gauge.
“All six major grocery store food group indexes rose,” the government said. A gauge of meat, chicken, fish, and eggs jumped 2.2% over the month, while the index for beef increased nearly 5%.
For fun (or not, depending on how you want to look at it), I plotted the MoM percentage gains in the US CPI food at home index with the UN’s food gauge.
Even if the figure (above) is apples to oranges (the food pun was accidental, but I’ll take it), it’s still instructive, I think.
While it’s difficult to imagine Wednesday’s data, in isolation, will change (or win) any hearts and minds, where that means compelling anyone to “switch camps” in the “transitory” debate, it does underscore lingering price pressures. I don’t see any way around that assessment.
The updated figure (below) shows the government’s tortured data is catching up to the on-the-ground reality in the housing market, for example.
Nevertheless, there were no “bombshells” in the numbers to speak of.
Markets will probably look right through this, especially given no obvious read-through for the Fed taper.
As BMO’s Ian Lyngen put it, “there is nothing in this report to imply the Fed will alter the tapering timeline nor is there anything to challenge the ‘transitory’ characterization.”
And that’s that.
The “beauty” of transitory is how nebulous it is. There’s no deadline. If by 2023 we’re still experiencing supply chain disruptions and “murky”yoy CPI prints of 5+ % transitory could still be claimed on a forward looking basis despite being 24+ months on from the start of problematic inflation.
I think the Fed needs to find less nebulous descriptors for economic events than words like transitory. Transitory literally means “not permanent”. Everything in economics is not permanent. So when they say we believe (insert economic event name here) is transitory, they really believe what they are saying and so should we. But how is that really guidance? It’s stating the obvious, that things will change at some point down the road. Shouldn’t we expect these people to have some IDEA of when these changes should occur? I just fail to see how these remarks are any kind of guidance at all. We could be stuck with inflation for 2 years and when it eventually does abate, the Fed can still say “see, transitory!” That won’t have changed the bankrupt lower class who has been starving for 18 months, but I guess that’s not the point is it?
Yes, I think the point is exactly what needs to be considered. The Fed guidance is not really about giving people information about what will happen in the real world but more about telegraphing changes in Fed policy. I think the message they are trying to send is that they do not intend to address inflation in the next 6-12 months by adjusting rates and perhaps will taper other support more gradually. If they meant to do something more serious they would likely say they expect sustained inflation slightly above their targets. The Fed is not so radical as to try to actually address problems, they just want to keep the markets chugging along and out of a panic. I’m not entirely convinced the Fed will not have to consider actually increasing support as policy solutions continue to fail to materialize. I’m not convinced they won’t end up getting pulled into the budget issue and capitulate that they are just using MMT and monetizing debt anyway so may as well directly monetize the budget. It’s a very small chance especially under Biden but if he needs to get something done without Congress I’m hard pressed to think of any alternatives.
The FOMC would be smart to pull off the bandaid and start tapering process in November- and I am generally a monetary dove. They could do it gradually (5 or 10 billion per month) and announce they can either pause or speed up the taper as events unfold. They can also suggest to the market that a rate increase at this time is not being considered. That will give them flexibility, and the market enough certainty, while also starting to unwind the extraordinary monetary largess. The comment from Powell that they could finish the taper by mid year was not helpful or necessary. Given the uncertainty about supply and the effects of COVID on the economy that makes the most sense.
It seems to me that the Fed is at a crossroads, not necessarily of their own making. At this point, accommodative policy has placed two of its objectives directly at odds with one another. While the accommodative policy is certainly maintaining the stability of the financial system and containing systemic risk that may arise in financial markets, it’s also simultaneously working against the objectives of full employment and price stability. Given the choice of one over the other, they are choosing to maintain market support while dismissing unemployment and inflationary impacts. What I think is well known if not overtly recognized is that we’ve hit a point in our trajectory where the only way to sustain stability in the financial markets is by maintaining an accommodative monetary policy. The only way to revert this course would be to allow systemic shocks that have been papered over well since the GFC to come to fruition. I suspect that no one wants that happening on their watch.
Again, I still think it is worth remembering that several Fed chairs were invested in the same securities that the Fed is actively purchasing. While this has been largely dismissed, I think it bears remembering as it could influence FOMC decisioning.
I don’t have a good sense of all the prices in food but I do know that nice beef tenderloin at my local store was $18/# in late winter and yesterday the same steak at the same store was $28.95. Ouch. Nice hamburger is five or six dollars. (Keto guy)