US consumer prices rose more than expected last month, hotly anticipated data showed.
Headline CPI surged 7% YoY in December (figure below), the most in decades. While that merely matched consensus, the MoM print, at 0.5%, was hotter than the 0.4% increase economists projected. The range, from more than five-dozen forecasters, was 0.2% to 0.6%.
Core prices came in hot too, rising 5.5% YoY, against estimates for a 5.4% gain. MoM, the core gauge rose 0.6%. Economists expected a 0.5% increase.
Although the figures obviously represent an untenable state of affairs, the upside surprises arguably weren’t large enough to materially impact the macro narrative. The Fed’s abrupt (some would call it “aggressive”) hawkish turn prompted market participants to fully price liftoff in March, and analysts are coalescing around four hikes in 2022. Balance sheet runoff will come sooner, and proceed at a faster pace, compared to the last cycle.
In short, policymakers got the message, pivoted and markets now expect double-barreled tightening during the first year of Jerome Powell’s second term, the same policy bent that prevailed over the first year of his tenure as Chair in 2018.
A look below the hood of December’s CPI report showed the first deceleration in energy prices in quite a while (figure below). Gauges for gasoline and fuel oil fell and natural gas prices dropped for the first time in 11 months.
Although the Biden administration will likely tout its own efforts to rein in prices, the relief was shallow. And it goes without saying that the YoY prints are still scorching-hot.
Food prices rose again, albeit at the slowest pace since August (figure below). YoY, food prices were up more than 6%.
Five of the six major grocery store food group indexes rose last month. Prices for fruits and vegetables jumped 0.9%, while the dairy gauge jumped 0.7%. Prices for cereal rise too.
The government was pleased to inform consumers that the index for meats, poultry, fish and eggs declined in December, “after rising at least 0.7% in each of the last seven months.”
Not surprisingly, shelter costs rose again. Both the indexes for rent and owners’ equivalent rent jumped 0.4% last month, matching increases from November. The figure (below) is familiar. It shows the lagged effect from surging property prices.
Although pandemic dynamics played a starring role in what many believe is a new American housing bubble, the Fed gets an award for best supporting actor courtesy of monthly MBS purchases. Mortgage rates are now rising, turning the screws on would-be buyers at a time when soaring prices contributed to an increasingly onerous downpayment burden.
There was no sign in December’s report of price moderation from autos. New vehicle prices rose 1% or more for an eighth straight month, while the used vehicle index was up 3.5%, following 2.5% gains in each of the prior two months. The apparel index rose 1.7% in December, the biggest increase in nearly a year.
Despite virtually no evidence that inflation pressures are abating, and more evidence that price increases are broadening out, you could argue that nothing in the report was shocking enough to change the narrative. As alluded to above, it would take a left-field data point — a real outlier print — to force the Fed to adopt a more hawkish bent than they’ve already telegraphed. Given that, the market reaction to December CPI is likely to reflect an “as-expected” read.
“Overall, an uneventful report from a trading perspective as it simply confirmed the March liftoff scenario,” BMO’s Ian Lyngen said, adding that the backdrop “argues for a relatively clean read of investors’ reaction function.”
“The market has been pricing in a hot CPI print [and] recent price action is a function of the simple ability for many managers to add-back their ‘hawkish / bearish’ views thanks to fresh YTD risk-budget,” Nomura’s Charlie McElligott said, prior to the release. “Even just an in-line number could see an initial disappointment [or] squeeze in ‘bearish / hawkish’ trades.”
“Who doesn’t like a bit of nostalgia for the 1980s?,” ING’s James Knightley asked, before noting that “inflation rates, like shoulder pads, are probably something we would prefer to do without.”
“Headline CPI surged 7% YoY in December (figure below), the most in decades. While that merely matched consensus, the MoM print, at 0.5%, was hotter than the 0.4% increase economists projected.”
I have never understood how it’s possible for the YoY and MoM to miss by different amounts. We know the prior month’s prices. We know the prior year’s prices. We forecast the current month. If forecast misses by 0.1%, shouldn’t that be true of both the MoM miss and the YoY?
Although I am not and expert I believe it may have something to do with the nature of the changes in underlying prices. The CPI, for example, is an index comprising many different elements, each of which is weighted to reflect its importance. If one or two elements change in one part of the year and then others change more later, this could change the comparisons. The index comes from the prices of 80,000 items, grouped into 7776 area/item combinations. The BLS.gov website has details.
The percentages are calculated with different denominators and the same numerator. This would make a good SAT question. CPI surged 7% YoY and 0.5% MoM. What was last month’s CPI growth relative to last year’s CPI? (Answer: 6.47%)
Very good. But given that 6.47% is a statistic known to forecasters in advance, how is it possible they forecast 7% YoY (correctly) but 0.4% MoM (incorrectly. Since it’s the same numerator, it should give proportional forecasting error of similar size and magnitude, should it not?
Housing is about 40% of the basket. Hard to think accelerated QT of MBS isn’t being considered.
Here is another take on the year end ‘financial state of affairs’ communication from Federal government/Fed to the American people:
2021- what a year!
Hope you enjoyed your minimum wage increases- sorry about the fact that the buying power of any increases was more than obliterated by inflation. We are, however, pleased to report that we are making great progress in inflating away the existing $29.7T we have previously borrowed. Never mind that there is not much benefit from that to you today. But it will make things better (maybe) for your children’s children. Or maybe their children. For now, we are going to ignore the fact that you are having less children because you can’t afford them. Stay tuned, we will have more to say on that at an undetermined later date, as US government-sponsored ‘adoption-from-abroad’ programs are in the works, as we might be short a few workers.
Luckily, we have also made it possible for you to borrow in order to continue to spend/pay rent/eat food due to record low interest rates. However, we regret to inform you now that your credit card/debt balances are rising, short term interest rates will also be going up in 2022. Plan accordingly!
All in all- not too shabby. Hope you agree (fyi- we have activated the “no-reply” function on this email communication).
All the best to you in 2022…..And don’t forget to get vaccinated/boosted and to vote.
We’ve got your back!
I think we’re forgetting how close we were to a Depression and all-out calamity in 2020. I’ll take multi-year inflation and a recession over a Depression any day.
H-Man, I saw Kevin Muir had a post in Bloomberg that was a good take on the Fed and rates. You use to post some of his musings, has he gone to your dark side ? I liked his pointed “here is where my money is going”.