August’s CPI was considerably stronger than anticipated, indicating inflation is firmly embedded in the economy. Most believed inflation had peaked.  Core CPI was double of what was expected, almost eclipsing the 41 year high measured in both February and March.

The Atlanta Fed’s so called sticky CPI measure rose 6.1% in August from a year ago, the biggest gain in 40 years.  Meantime, the Cleveland Fed’s median CPI, which excludes categories with the largest price changes, increased by the most in data back to 1983.

Shelter costs, which are the biggest component of the overall CPI index—continued to rise.  OER (what someone can rent their house for if it was indeed rental) was up 0.72%, the largest month on month increase since 1991 and its steepest year on year increase since 1986.  OER comprises about 32% of the overall index and about 40% of the core CPI.

Food costs increased 11.4% from a year ago, the most since 1979.  Electricity prices rose 15.8% from 2021, the most since 1981.  Gasoline prices, meanwhile, fell 10.6% in August, the biggest monthly drop in more than two years.

The markets have now fully priced another 0.75% increase in the overnight rate at next week’s FOMC meeting.  The market is beginning to discount a 100-bps increase.

A major issue at hand Fed policy does not directly impact the reasons for today’s price surge. Conducive fiscal and regulatory policy is required.  As noted several times, today’s fiscal policy has defied science, logic and economics.

A significant question at hand is the decline in oil prices temporary?  The IEA  (International Energy Agency) stated domestic US production will continue to drop given the continued decline of active wells, the result of lack of capital, men, material and regulatory fiat.

The Permian is a prolific oil producing region.  The number of drilling rigs in this area has hit a four-month low of 319.  There were 331 in July, which is significantly lower than 443 rigs in 2019 and 349 in 2014.

Will oil again become a major inflationary variable amplified by the geopolitical environment?

The CPI was the catalyst for a broad-based selloff, sending the NASDAQ down 5.2%, the largest decline since March 2020 according to Bloomberg. This was seventh time this year the NASDAQ plunged by 4% or more according to Bespoke Investment Group.

Last year there were no decline of the same magnitude while in 2020 there were 10.  Prior to that, there were only three such drops in total from 2012 through 2020.

The Dow fell about 3.9%.

Commenting about the bond market and reiterating above comments, a 75-bps increase has fully been discounted at next week’s FOMC meeting and the market is now beginning to discount 100 bps increase, the first since 1994.

Today the PPI is released.  Will this too exceed expectations?  Analysts are expecting a 0.1% decline in the headline rate and 0.3% increase in core PPI.

Last night the foreign markets were down.  London was down 1.01%, Paris down 0.51% and Frankfurt 0.59%.  China was down 0.80%, Japan down 2.78% and Hang Seng down 2.48%.

NASDAQ and Dow futures are up about 0.30% ahead of the PPI. The 10-year is off 10/32 to yield 3.45%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.