Breaking News: More Terrible US Inflation Data

The good news is that the bad news was already in the price. Hopefully.

Key US inflation data out Friday came in hotter than anticipated, another ostensible blow to sentiment at an extremely delicate juncture.

Mercifully, August’s above-consensus core inflation impulse is old news. The CPI report was baked into the Fed’s new dot plot, and thereby into market pricing. Or you’d like to think so, anyway. That should lessen the risk associated with an otherwise unnerving update on core PCE prices, which rose 0.6% MoM in August, more than expected (figure below).

The headline gauge notched a 0.3% increase, triple the slight uptick economists forecast.

To be sure, this is incrementally bad news. Especially in the context of wave after wave of hawkish Fed banter. But I doubt many serious market participants expected to be pleasantly surprised. This hasn’t exactly been a good news-type of year. The bull market in bad news is commensurate with the bear market in everything else.

The YoY prints were likewise ahead of consensus, at 6.2% on headline and 4.9% on core (figure below).

Revisions pushed July’s 12-month core print up to 4.7%, insult to injury. Friday’s data included annual adjustments.

It’s been two years since the Fed adopted “flexible average inflation targeting.” If the goal was to engineer an overshoot to make up for prior shortfalls, it’s working (figure below).

I realize that’s a bad joke. But repeating it does serve a purpose: It’s a reminder of how rapidly the macro zeitgeist has changed. Just 24 months ago, central banks were actively encouraging inflation. Be careful what you wish for.

Friday’s update from the BEA also showed personal spending rose twice as much as expected in August. Real personal spending matched estimates with a 0.1% gain. Personal incomes were in line, rising 0.3%.

A near $68 billion increase in current-dollar PCE last month came courtesy of $97 billion in spending for services. Spending on goods fell $29.4 billion. Within services, the biggest “contributions” (and I’m not sure that’s the best word choice here) came from housing and utilities. On the goods side, spending on gas and energy obviously fell. The report covers a stretch that included one of the longest runs of daily declines in US gas prices ever.

All in all, Friday’s top-tier US data underscored the case for more outsized rate hikes from the Fed. But what else is new(s)?


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