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Macro Developments Since the Jul FOMC: Inflation (2/2)

US
  • The opposite is true for CPI inflation, with core CPI first surprisingly soft in July before ripping higher in August (released Sep 13), seen as locking in a 75bp hike this week and forcing a substantial re-pricing of higher terminal and 2023 rates generally.
  • Sequential core CPI inflation bounced from July’s soft 0.31% M/M to 0.57% M/M, sharply unwinding hopes of cooling price pressures with a two-pronged acceleration in goods (limited sign of impact from supply chain easing) and services (both sticky and wage-sensitive alike), with the breadth of pressures driving a new high in monthly median CPI.
  • Core goods defied expectations of a cooling on squeezed margins as the rate doubled, while core services saw surprising strength in shelter – a yet new multi-decade high for OER M/M inflation – but also in other wage-sensitive categories such as medical care.
  • Having been preceded closely by VC Brainard on wanting to see “several” months of lower inflation and Governor Waller implying perhaps even longer, it essentially reset the clock on how soon the Fed might look to stop aggressively tightening monetary policy.
  • Early indicators suggested core PCE bounced to at least 0.41% M/M in August (potentially higher after the PPI details), a quick reversal after July saw the first monthly rate since Mar-2021 below that consistent with the 2% inflation target.
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  • The opposite is true for CPI inflation, with core CPI first surprisingly soft in July before ripping higher in August (released Sep 13), seen as locking in a 75bp hike this week and forcing a substantial re-pricing of higher terminal and 2023 rates generally.
  • Sequential core CPI inflation bounced from July’s soft 0.31% M/M to 0.57% M/M, sharply unwinding hopes of cooling price pressures with a two-pronged acceleration in goods (limited sign of impact from supply chain easing) and services (both sticky and wage-sensitive alike), with the breadth of pressures driving a new high in monthly median CPI.
  • Core goods defied expectations of a cooling on squeezed margins as the rate doubled, while core services saw surprising strength in shelter – a yet new multi-decade high for OER M/M inflation – but also in other wage-sensitive categories such as medical care.
  • Having been preceded closely by VC Brainard on wanting to see “several” months of lower inflation and Governor Waller implying perhaps even longer, it essentially reset the clock on how soon the Fed might look to stop aggressively tightening monetary policy.
  • Early indicators suggested core PCE bounced to at least 0.41% M/M in August (potentially higher after the PPI details), a quick reversal after July saw the first monthly rate since Mar-2021 below that consistent with the 2% inflation target.