13 Jan CPI MET EXPECTATIONS…HIGHEST INFLATION SINCE JUNE 1982
The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
Excluding the volatile food and energy components, December’s core prices rose by larger than forecast amount…increasing by 0.6%. This measure jumped 5.5% from a year earlier, the biggest advance since 1991.
The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs contributed. Energy prices, which were a key driver of inflation through most of 2021, fell last month.
Commenting about energy costs, the energy index declined 0.4% from November, the first monthly decline since April. This decline is likely to be reversed in January’s data.
Regarding shelter, which are a more structural component of the CPI and make up about a third of the overall index, rose 0.4% from the prior month. Other gauges of home prices and rents have surge, likely presaging a sharp acceleration in the report’s housing metrics this year and offering an enduring tailwind to inflation.
The bond market reaction to the data was muted. Immediately following the release, the 10-year Treasury was essentially unchanged trading around a 1.75% yield. The most obvious conclusion to make that this annual 7% annual inflation rate is only temporary believing that the Federal Reserve will soon bring the inflation rate within a narrow band centered on 2% within a year.
To write it differently, today’s low interest rates “forecast” low inflation, a “rational expectation” that comforts the Fed. How realistic are these expectations?
The WSJ writes “the 10-year Treasury averaged 11.5% in 1980 and rose above that level in 1984 despite a decline in the rate inflation from more than 12% in 1980 to less than 4.0% in 1984. According to the Journal, one open market participant then stated, “why are long term interest rates going up instead of coming down?”
I worry that today is the flipside of the Volker era where forty years of price stability has brought upon extreme complacency which may cause even bigger issues tomorrow.
Since 1982, the Bloomberg US Aggregate Bond Index (intermediate investment grade bonds) has only had four down years and never back-to-back. Last year was the fourth year out of forty. The last down year before 2021 was 2013. As noted earlier, Treasures are having the worst start of the year in about 20 years. Is or will this complacency about to be shattered?
Commenting on yesterday’s market activity, equities were essentially unchanged with many perhaps a sigh of relief that the inflation data largely met expectations.
What will happen today?
The producer price index is released (PPI) is released at 8:30. Year over year the PPI is expected to increase annually by 9.8%, ex food and energy 6.9. How will markets respond to the data?
Last night the foreign markets were down. London was down 0.06%, Paris down 0.59% and Frankfurt down 0.02%. China was down 1.17%, Japan down 0.96% and Hang Seng up 0.11%.
The Dow and the NASDAQ should open flat. The 10-year is off 1/32 to yield 1.75%.