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theSTATreport^ is home of the “In Focus” series. A data-driven, in-depth, evidence-based series about the US Fed, FOMC, and US Economy.
In this article:
Highlights on CPI
Scenario Analysis for Shelter
Think Ahead — Reflective thoughts to keep in mind regarding the Fed.
Are the forward market pricing and Fed communication about the forward rate move expectations the same? They both can’t be right if they are on different paths. Think about cause and effect. What are the current conditions that support current thinking - and why - for the FOMC and market participants? What are some potential likely paths this may play out?
What characteristics does the labor market need to have for the Fed to have 2% inflation?
How does the Fed think about their dual mandate? What key stats are they watching, what are they looking for in those stats, and over what time frame?
With the Fed’s dual mandate, in the future when unemployment starts to rise and if inflation is still to high, how will they approach that scenario?
Fed in Blackout.
Wall Street (1987) - Anacott Steel
If the Fed will do what they have been saying, the market still has some adjustments to make within it’s pricing and today it seems pricing is getting more closely realigned with past Fed communications.
Strong CPI.
Fed’s larger focus of the two is Core CPI (Ex Food and Energy).
More Evidence of
wages are feeding into prices
inflation is broadening out, including services
Energy fell again (5% vs 4.6% last report)
Little Evidence of
Firms offering steep discounts to liquidate excess inventories
No Evidence of
Rents peaking
Labor accounts for +50% of output. With labor rising at approx. 10% in 1H ‘22, firms should be motivated to boost prices. As discussed before, consumers getting higher wages gives them increased spending power thereby helping maintain higher demand.
MoM CPI % change, weighted highest to lowest.
Sticky inflation1 has a tendency to stick around.
Shelter MoM%
Shelter YoY%
Projection Assumption Scenario
Shelter makes up 32% of the index. Using the August MoM shelter #, lets see how this # may influence the forward YoY CPI #.
Rent of Shelter, Owners Equivalent Rent, and Owners Equivalent Rent of Primary Residences.
Shelter probably will peak sometime within 1H ‘23. Larry Summers thinks we’ll have upward pressure in the CPI report for shelter for 6 - 9 more months.
Core CPI YoY will likely increase in coming months.
All the Fed members have made it clear they are looking for several months of broad based evidence that inflation is coming down.
Which circle’s back to this articles subtitle.
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Sticky Price Index consists of: Food Away from Home; Household Furnishings and Supplies; Infants and Toddlers Apparel; Medical Care Commodities; Alcoholic Beverages; Personal care products; Miscellaneous Personal Goods; Rent of Primary Residence; Owners Equivalent Rent of Primary Residence; Water, Sewer and Trash Collection Services; Medical Care Services; Motor Vehicle Maintenance and Repair; Motor Vehicle Insurance; Public Transportation; Recreation Services; Education and Communication Services