Investors Preparing for ATH Inflation in 40 Years
ZFX – If consensus is correct, the last time inflation was this high was in the early years of the Reagan administration – when the US was in the midst of a steep and persistent recession.
The Labor Department on Friday morning will release an index that measures the cost of dozens of items via the November consumer price index . The index covers general items including gasoline and ground beef, but extends to more detailed purchases such as frozen vegetables, indoor plants and flowers, and pet supplies.
Wall Street expects the index to reflect a 0.7% gain for the month, which would translate to a 6.7% gain from a year ago, according to Dow Jones estimates. Excluding food and energy, the so-called core CPI is projected to rise 0.5% month-on-month and 4.9% year-on-year.
If the forecast is accurate, it would be the highest reading for the major CPI since June 1982. It was then that the index surpassed 7% after hitting more than 14% in March and April 1980, a record that still stands. In essence, that level would be the highest since June 1991.
A spike in inflation, however, is not new news for markets. Investors have watched multiple data points in recent months show their loftiest situations in decades. In fact, some economists suppose the caption increase could exceed 7.
What the request will watch about is how hot the situations are, and what response the Federal Reserve might spark.
“I do not suppose it’s going to be good for stocks,” said Tom Graff, head of fixed income at Brown Advisory. “The most likely reason why stocks will correct in the coming many months is because affectation is seen as so problematic that the Fed will have to get aggressive more snappily.”
Fed’s Reaction on Inflation
The Fed is already reacting to inflation and will soon do more.
At its meeting next week, the central bank is expected to accelerate the pace of withdrawal of economic support. In practice, that means a likely doubling of the tap in bond purchases to $30 billion per month.
That would end a program that has generated $120 billion a month in purchases ending around March 2022. After that, the Fed could start raising interest rates if inflation is still an issue.
“Everyone knows the [inflation] numbers are going to be pretty hot, but I think [if] it goes above consensus, especially on the core side, it’s going to be more challenging for the Fed to not just accelerate reductions, which is kind of a given at the moment, but might consider hiking early next year,” said Graff.
The current market price is for the Fed to impose its first 25 basis point rate hike in May or June. There’s about a 61% chance of three hikes coming in December, according to CME’s Fed Watch tracker.
However, TS Lombard US chief economist Steven Blitz thinks the Fed’s first hike will likely come as soon as March, the same month it is likely to end.
“The timing is pulled forward as the circumstances for starting the rate hike cycle anticipated a year ago developed rapidly at an unexpected pace,” Blitz said in a note to clients. “To be clear, our call is not about price spikes related to current scarcity. It’s about the inflation process (wages and, soon, lending) going on and the [Federal Open Market Committee] realized too late that they needed to catch up.”
For its part, the Fed next week is unlikely to commit too much to a rate hike next year, although it will update its economic forecasts and possibly pull the hike up somewhat.
At the committee’s September meeting, forecasts showed a slight slope toward an increase in 2022. But with CPI timing coming just before the Tuesday-Wednesday meeting, hotter readings will make it harder for policymakers to ignore bloated inflation.
A stronger-than-expected number “could create a greater sense of urgency for the Fed to react to high inflation through the possibility of an earlier rate hike,” wrote Citigroup economist Veronica Clark.
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