Higher CPI Inflation Forces Markets To Reprice

August CPI inflation data worse than consensus expectations; markets reprice in response. Bitcoin falls more than 10% and the S&P 500 Index closes down 4.3%. Fed Funds Rate expectations climb to 4.46%

Relevant Pieces: 

• 3/7/22 - The Daily Dive 

• 4/26/22 - Evaluating Bitcoin’s Risk-On Tendencies

• 6/23/22 - Growth Deceleration and The Dollar Wrecking Ball

• 7/23/22 - Brewing Emerging Market Debt Crises

• 8/22/22 - Strong Dollar Pummels Risk Assets

• 8/25/22 - Energy, Currency, & Deglobalization, Pt 1 

• 8/26/22 - Energy, Currency, & Deglobalization, Pt 2

• 9/7/22 - Europe: The Sovereign Debt Bubble Domino

Inflation Is Not Over 

Despite the overall consensus and sentiment for good inflation news this past month, the higher-than-expected U.S. August Consumer Price Index (CPI) print has derailed any short-term bullish momentum for risk assets that’s been building over the last week. As a result, equities, bitcoin and credit yields exploded with some volatility today. The S&P 500 Index closed down 4.3% with bitcoin following on a 10% plus down move. The last time this occurred for equities was June 2020. 

It’s a similar event to what we saw last month for July data, but in reverse and with more magnitude. Markets cheered on a loosely confirming trend of peak inflation last month, only to have today’s data say otherwise. Now we look to the broader market for risk and rates over the next few days to confirm this new rally downtrend or some relief with the Merge expected to take place late tomorrow night. 

Both headline CPI and Core CPI beat expectations that had consensus positioning for month-over-month deceleration. Instead, we got both headline CPI and Core CPI rising month-over-month to 0.12% and 0.57% respectively. In simpler terms, inflation has not been vanquished yet and there’s more work to do (or attempt to do) on the monetary policy front. The Cleveland Fed Inflation Nowcast pretty much nailed their August forecast. 

Although we did see some inflation across energy commodities come down, it wasn’t enough to offset the growing inflation in the services sector. Higher and elevated wage inflation remains a key, sticky part of inflation that is yet to come down. Housing inflation is also still an issue and has yet to come down. Housing inflation and prices have typically been the last to fall into a pending deflationary and/or recessionary period. Rent inflation (aka owners' equivalent rent (OER)) is a significant component that can keep up CPI prints for longer as it’s usually a six-to-nine-month lag. 

Overall, the inflation picture looks to be sticky and broadening. Based on the Federal Reserve’s statements over the last few months, it’s a clear sign to keep aggressive monetary policy via rate hikes going. More on that below. 

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Source: Michael McDonough, Bloomberg 

Source: Federal Reserve Bank of Atlanta Wage Growth Tracker 

Source: Len Kiefer, Freddie Mac

Immediately following the release of the CPI data, equities and bitcoin began to sell and the dollar soared. The price action of the asset classes was less about the inflation itself and more about the market’s expectations for future monetary policy from the Federal Reserve.