Inflation, Inflation, Inflation


Overview: The spotlight was completely focused on inflation for investors and global central bankers over the past week. The latest inflation data showed much higher levels than expected, and mortgage rates jumped.

 

The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In August, CPI was 8.3% higher than a year ago, which was far above the consensus forecast of 8%. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. Core CPI in August was 6.3% higher than a year ago, also well above the consensus forecast. The Federal Reserve’s target level for annual core inflation is just 2%, and recent comments from Fed officials have emphasized the need for aggressive action to reach this goal. Investors now anticipate a 75 basis-point rate hike at the next meeting on September 21, with a modest chance of an even larger 100 basis-point increase. The anticipated sharp decline in the price of gas was reflected in the CPI report, but there were unexpectedly large increases in many other areas. Food prices rose 0.8% from July and were 11.4% higher than a year ago, the largest annual rate of increase since 1979. Shelter costs, which make up roughly one-third of the weighting in the CPI, medical care services, and new-vehicle prices all also posted substantial gains of around 0.8% from July. Airline fares showed a welcome decline of 4.6% from July but still were 33% higher than a year ago.


With inflation rates at decade highs in the eurozone, the European Central Bank (ECB) raised interest rates by an enormous 75 basis points to the highest levels since 2011. The latest readings showed inflation in the eurozone at an annual rate above 9%, far above the ECB’s target level of 2%. ECB chief Christine Lagarde said that inflation is likely to stay above the target for “an extended period.” Investors expect that 50 basis-point rate hikes will take place at the next two meetings.

 

Core CPI (annual % change)

 

Week Ahead


September 15 — Retail Sales report

September 20 — New Residential Construction report (also known as Housing Starts)

September 21 — Reserve meeting (significant rate increase expected)

Existing-Home Sales report