Today’s closely watched CPI data – which comes just hours after China reported its latest record producer price inflation – is likely to show price pressures picking up by +0.4% M/M (from +0.2%) and 4.3% Y/Y (from 4.0%); the core rate is seen rising by 0.6% M/M (from +0.4%), and 5.8% Y/Y (from 5.4%).
As Deutsche Bank’s Jim Reid reminds us, last month saw yet another upside surprise to the CPI number which “further undermined the transitory narrative, and, in fact, if you look at the last 7 monthly readings, 5 of them have come in above the median estimate on Bloomberg, with just 1 below and the other in line.”
In terms of what to expect, DB’s US economists are looking for a reacceleration in the monthly prints, with a +0.47% forecast for the headline measure (+0.6% consensus), and +0.37% for core (+0.4% consensus).
Their view is that the main driver is likely to be price pressures in those categories most sensitive to supply shocks, such as new and used vehicles. But they also see some downside risk from Covid-19-sensitive sectors like lodging away and airfares, where prices fell over the late summer as the delta variant slowed the recovery in travel.
Look out for rental inflation too – last month we saw owners’ equivalent rent experience its strongest monthly increase since June 2006. It’s a measure that reflects underlying trend inflation, so it is important to monitor moving forward. Many models suggest it will be over 4% for much of next year, which is large given that it makes up around a third of the headline rate and c.40% of core. Indeed, lagging shelter inflation (roughly a 4-5 month lag behind real-time soaring rent costs) will keep inflationary pressures elevated into 2023.
Nomura’s economists also chime in and write today that they forecast core CPI inflation at 0.4% (0.428%) m-o-m (Consensus: 0.4%), up from 0.2% (0.243%) in September and 0.1% (0.102%) in August: “If our forecast is correct, core CPI inflation would be 4.4% (4.405%) on a y-o-y basis (Consensus: 4.3%), up from 4.025% in September.
Incoming information suggests that certain COVID-sensitive service prices and supply chain-related components stopped declining in October and we expect rent and owners’ equivalent rent (OER) inflation to decelerate slightly but remain robust. On the whole we think core inflation will likely remain elevated in Q4 and Q1 before moderating substantially thereafter.”
For a more detailed breakdown of what to expect from the various components, we go to Newsquawk, which quotes Pantheon Macroeconomics in saying that car prices are airline fares are set to underpin the rise in inflation in the months ahead, which will take headline rates close to 6% early next year — today’s report may begin to show this effect.
It is worth noting that Treasury Secretary Yellen gave some soothing remarks on inflation Monday, suggesting that the Fed would not allow a repeat of 1970s, which some have taken as a sign that we should expect an upside surprise to that consensus view. Analysts expect that any upside to the consensus view would, at a knee jerk at least, result in hawkish pricing of the FOMC rate trajectory.
For now, the Fed continues to see price pressures as transitory, although officials are clearly cognizant of risks it becomes something more persistent. But Fedwatcher Tim Duy argues that while the Fed will become increasingly nervous about inflation, it will not become so nervous that a policy pivot is imminent.
Duy says “the general view at the Fed is that there is plenty of room for pulling rates forward from 2023 into 2022,” he writes, “in other words, there is room to turn more hawkish without accelerating the pace of tapering.”
Duy suggests that at a minimum, the Fed believes it has until the March meeting before it needs to do some hard signalling about the second half of 2022, and moreover, the leadership turnover at the Fed also argues for maintaining the status quo until staffing settles out more. “To get a hawkish pivot early, I suspect something must happen to take the transitory case off the table,” which could be “something that looks like a shift in the inflation/wages/expectations dynamic”.
On that note, we’ll also be paying particular attention to the real weekly earnings measure, which was +0.8% M/M in September; in last week’s employment situation report, average earnings rose to 4.9% Y/Y from 4.6%, and the workweek hours eased to 34.7hrs from 34.8hrs; add to that the recent Q3 employment costs and productivity data has highlighted surging labor costs and lower productivity, which is a dynamic that might convince some hawks of the need for tighter policy, sooner.
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