Like shoppers waiting anxiously for a monitor in the checkout line to tally the damage from another hugely expensive trip through disheveled grocery aisles, Fed officials will hold their breath this week in anticipation of another painful headline CPI number.
Data due Wednesday will likely show consumer prices rose almost 9% last month from the same period a year ago (figure below), a new four-decade high and the starkest testament yet to a cost of living crisis that’s left policymakers panicked and kept the White House in damage control mode for most of 2022.
June’s jobs report, which beat expectations and came packaged with another hot read on average hourly earnings (not to mention upward revisions to the prior month’s wage growth figures) likely cemented the case for a second consecutive ultra-large rate hike from the Fed later this month.
A benign inflation report is out of the question on any conventional definition of the word “benign.” Even if the numbers aren’t as bad as expected, Fed hawks won’t be dissuaded.
The media will focus on the 12-month print, not because media outlets care about US households (if they did they’d stop poisoning them with sensationalized coverage of tragedies and propagandized reporting on everything from the economy to foreign policy to local issues), but rather because those numbers are amenable to click-generation by way of “since 1981” headlines.
Fed officials, by contrast, are concerned with the monthly readings. Unfortunately, no relief is expected on that front either. A weekslong losing streak for commodities and a decline in gas prices from record levels (in nominal terms) probably came too late to help.
Core prices probably rose 0.6% on a monthly basis again, while the headline gauge likely rose 1.1%, the third MoM reading of 1% or more in four (figure above).
It was, of course, May’s disastrous CPI report that tipped the scales in favor of the largest rate hike since 1994 at the June FOMC meeting. In May, food at home prices notched a fifth consecutive monthly gain of 1% or more. On an 12-month basis, grocery prices rose almost 12%, the most since 1979. The shelter gauge rose 0.6% MoM, the largest monthly gain in more than 18 years. Policymakers, analysts and market participants in general will be keen on any additional evidence that inflation is broadening out and embedding itself across the economy.
I’d be remiss not to at least mention that once consensus starts leaning hard one way, reality has a remarkable tendency to move decisively in the opposite direction. In the context of the world’s penchant for frustrating our attempts to understand and forecast it, I suppose it’s possible the CPI figures could come in cooler than feared. I’m not sure that’s a good investment thesis, though. It’s feasible, however, that PPI data for June, due a day later, could show pipeline inflation abating. But even there, “abating” is a relative term — a misnomer, even. PPI will probably still print a monthly gain consistent with May’s increase.
Consensus expects 0.8% on the MoM headline PPI print (figure above). Price indexes from recent PMI surveys were a mixed bag. They’re all elevated, but some have come off the peaks. On a 12-month basis, US producer prices are riding a six-month streak of double-digit increases.
Assuming the CPI report is as bad as most market observers expect it to be, one obvious question is whether it could be bad enough to prompt the Fed to consider a 100bps hike. Do note: Unlike the June FOMC, the Committee would have the opportunity to socialize any shift in thinking prior to the pre-meeting quiet period this month.
“There’s a compelling argument to be made that the Fed should go 100bps, even if we view such a move as highly unlikely without another significant upside surprise from Wednesday’s CPI print,” BMO’s Ian Lyngen and Ben Jeffery said. “Unlike last month however, the Fed won’t be in the pre-FOMC period of radio silence immediately after the data is released [so] media leaks and speculation shouldn’t be necessary in the event Powell is pondering 100bps,” they went on to write, adding that “it’s with this context that we’re sympathetic to the non-zero probability of a three-digit hike.”
The June minutes suggested Esther George’s attempts to talk her colleagues out of what she later described as an “abrupt” escalation fell on deaf ears. What I’d note, though, is that only Willams, Barkin, Waller and Bostic have scheduled speaking engagements this week, and of those, only Waller and Bostic speak after CPI.
That doesn’t necessarily preclude someone else — say, Bullard or Brainard — from showing up on business television Thursday or Friday, but that’d be risky. An unscheduled cameo following a red-hot inflation report with the market already priced for 75bps would be seen as confirmation of a 100bps move. It’d be crossing the Rubicon, and because the media blackout starts the following week, there’d be no way to walk it back without resorting to yet another press leak like the one which preceded the June meeting. That’s precisely the kind of unpredictable policymaking that some observers (e.g., Mohammed El Erian) have suggested is damaging to the Fed’s credibility, even as other commentators argue that a Fed which doesn’t feel the need to constantly inform markets about its thinking is in fact a very credible Fed in the current circumstances.
Whatever the case, I suppose it’d be derelict to rule out a full percentage point hike. Especially with the preliminary read on University of Michigan sentiment due Friday. Recall that a (subsequently revised) uptick in longer-term inflation expectations on the Michigan survey was the last straw for the Fed in June. That print (3.3%) came less than two hours after May’s CPI figures.
Economic momentum has decelerated since the June meeting, presumably reducing the odds of even a 75bps hike this month, but as I’ve mentioned here on any number of occasions, it seems highly unlikely that the Committee would chance a 50bps move. That’d be seen as unequivocally dovish and a pivot back in the direction of growth-conscious policy at a time when every, single Fed official is on the record emphasizing inflation as the number one concern. It’d also raise the stakes materially at Jackson Hole next month if inflation developments deteriorate and appear poised to worsen prior to the September meeting.
“Softer economic data… have signaled an increasing risk of recession this year, which has led some market participants to second-guess the Fed’s resolve in hiking meaningfully above neutral,” TD’s Priya Misra remarked. “We judge, however, that Fed officials will continue to overweight inflation risks above those for output [and] remain of the view that the Committee wants to get to their longer-term neutral policy rate rather quickly in the face of still robust demand and an unbalanced labor market.” Misra sees another 75bps hike this month.
As for the 100bps tail risk, BMO’s Lyngen, despite describing such an outcome as exceedingly unlikely, gently noted that “the prevailing sentiment from the Fed ahead of the last CPI release was that 75bps wasn’t on the table.” “Recent history as it is, we’re unwilling to suggest that the Fed won’t be actively considering 100bps until the market is on the other side of CPI and retail sales,” he added.
Don’t forget: The June minutes, “stale” as they were in the context of rising recession odds, showed Fed officials saw a “significant risk” that “elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.”
Not a lot of comments out there this morning. Must be the Wimbledon final. In the 70s inflation appeared in lockstep across commodities, goods and services. Not so right now. I travel a lot, so I am painfully aware how high airfare, rentals and hotel rates remain — but in two cities this week the occupancy rates were below 80$. Gasoline this week dropped to under $4 this week, down from $4.7 just two weeks ago. Veggie and meat prices in the mid south have continued to soar. There are price reductions stickers across the for sale signs on houses near me, and a builder who started a small development of 5 acre manors near me has defaulted with his lender due to non interest. It’s sort of a worst nightmare for anyone making policy, isn’t it?
occupancy below 80%
A nine handle on the CPI number would be disastrous and almost force the FED to hike 100bps. 75bps seems like a done deal, as does at least 50bps in Sept. Job market is strong, and there’s still a lot of work to be done on the inflation front.
Having no scheduled meeting in August is awkward, at this critical time with the economic situation changing rapidly.
For example, national retail gasoline prices are -8% in a month, while wholesale gasoline and crack spread down -18% in a month implies retail prices should fall another -10% in the coming month. Motor fuel is a 4% weight in CPI so each -10% MOM decline in gasoline prices could take -0.4% off CPI MOM.
Food commodity prices are either flat or falling, so grocery prices should stabilize or decline. Food at home is 8% weight in CPI so each -5% MOM decline in grocery prices could take -0.4% off CPI MOM.
Apartment rent inflation MOM has not clearly slowed, but it has stopped accelerating. House price inflation has gone negative on a MOM basis. I understand there is a lag before house prices are reflected in OER and CPI, but I’d guess it shows up faster in the MOM than in the YOY data.
Then there’s the stuff that WMT and TGT are overstuffed with – the inventory correction in appliances, home furnishings, apparel, etc. Plus the discounting starting to show up in computers and consumer electronics.
Industrial metals and transport prices are coming in. DRAM is declining MOM. TSMC’s business has slowed sharply in just the last month or two.
Go through the CPI basket and judge whether you think prices in each category will soon be rising, flat, or declining on a month-over-month basis. Add up the basket weights and do some back-of-envelope estimating.
I could see CPI MOM slowing visibly in the next couple of months, from direct commodity price effects alone, even before the other factors kick in. CPI at “just” 0.6% MOM in a couple months would be pretty encouraging to the Fed and the markets. This may not be visible in July data, which makes August even more important.
Maybe the Fed should announce that it will have an August meeting, just to keep a closer eye on things. The announcement alone would have a tightening effect.
Maybe the Fed should just let the economy fix itself. Stop hovering.
Consumers must buy gas (up a lot more than 8-9% y.o.y) and food (also up a lot more than 8-9% y.o.y), often several times. This leaves much less money on the table for services and non-discretionary spending, as wages are not keeping pace. The economy must shrink. Inventories must pile up! Less demand will lead to lower prices if consumers are not buying.
So you may be right EmptyNester. Just leave the economy alone, it will fix itself!
But there also must be a real cost for money, otherwise there is continued unnecessary consumerism, malinvestment and increasing wealth inequality. We are not there yet, and IMHO not even close with a 100 bps rate hike !
The “All In” podcast described it as Supply Side shocks, so I believe the Fed has to hammer with at least 75 bps to get speculation and loose money under control before Putin in Russia decides to turn the screws this winter (which is just one of the looming influences on inflation).
H-Man, this was an interesting article in Barron’s about high inflation and low unemployment which happens rarely.
https://www.barrons.com/articles/inflation-unemployment-recession-federal-reserve-history-51653432584?mod=article_signInButton
But what caught my eye was the chart showing inflation and unemployment over the past 70 years. It appears that whenever inflation rose above 7.5%, it then always rose to almost 10% or higher.
Why does everyone seem to think there is a correlation between the inflation numbers, the economy and the Feds increasing interest rates? The latter only impact an economy 12- 18 months later.
Rising rates by the Fed are trying to to change both consumer and corporate psychology. Reign in your seemingly limitless spending and borrowing habits, which were caused by a decade of cheap money courtesy of the Fed).
The Fed is committed to higher rates. A 75 bps rise feels inevitable. But the psychological “shock and awe” value of 100 bps rate increase at this stage, especially if there is no sign of inflation moderating, is an option that may find its way on the table.
The consequences of the Feds actions will only be seen in 12-18 months when the severity of the coming recession will more clearly come into focus.
Two easy-to-make inflation mistakes, often made by media, pundits, even investors: 1) Thinking about price changes YOY (ignore annual, only MOM matters), 2) Thinking that prices need to “go down” to where they were before e.g. last year (no, they just to stop rising MOM).
Think about it this way, and it is easier to see how inflation could start easing.
As for Fed hikes only impacting real economy after a 12-18 mo lag, I question that. Rate hikes hit stock and bonds prices immediately, hit house prices very soon after, and the wealth effect is real, not to mention the immediate impact on conpanies’ cost of capital, trade and inventory financing, hurdle rates for projects, etc.
I do agree that some sectors (consumer borrowing, corporate borrowing, mortgage lending) get INFLUENCED a lot quicker than others.
Yes housing starts may go down. There are fewer buyers for homes and prices are going down. Just maybe the former really could not afford the new home they were looking at, especially when you are paying a few hundred dollars more a month for gas and food. And the latter, housing prices going down – is that really a bad thing?
Corporate earnings and future forecasts will also start reflecting the fall-off in consumer demand, which drives the economy. Energy and food inflation (that is reducing the purchasing power of the American consumer for service/non-discretionary items) is the root cause at this time, not fed rates. And I agree with you, M.O.M inflation may start looking better, but higher (energy) prices are here to stay.
Cheap money for a decade has led to excesses/bubbles in many parts of the economy simultaneously: excessive government debt, excessive consumer debt, overheated housing market, overvalued equity markets, ……
The pain of Fed interest rate hikes has yet to be felt. The FED is hoping to kill demand, but their tool box (interest rates) is crude. So we may be paying the price for a while !