2022 Theme: US Inflation - Are We At Peak US CPI Inflation?!

A new month means new data and unsurprisingly, the US CPI inflation print came out this past Tuesday. As usual, because inflation data continues to be "the new jobs number" as we frequently say, this release was highly anticipated, much discussed and markets reacted very strongly.

The basics:

  • US inflation leapt 8.5% in past year, the highest since 1981 and higher than expected.

  • But, in a glimmer of good news, core CPI rose slower than expected and came in at 6.5%.

Here is the updated chart:

And here is the steady month by month rise of the yearly inflation number.

You get the drift.

What is a little more puzzling is that stock markets reacted very positively on the day. Why?

Well, mainstream news headline writers may have focused on the former (big) number that beat expectations but investors and financial market observers zero'ed in on the latter core improvement and reacted with (major) relief.

The reason was likely because core inflation was very slightly less than expected and also demonstrated that perhaps, just perhaps, some of the pandemic-related backlogs, snags and surges in demand may be alleviating.

Core inflation is closely watched by central bankers and can be relied upon to influence their thinking about future interest rate hikes.

As we covered last week in our discussion of the bullwhip effect, many investors have been hoping for exactly this type of cool down and so were willing to - at least temporarily - look past the still incredibly high number to instead focus on the possibility of a cooling inflationary pulse.

Something to keep in mind on this front, however:

Nearly all of this slowdown in core inflation was explained by the fall in auto prices that we referenced last week. Core goods prices ex-autos continued to rise quickly.

Wall Street may have celebrated on the day but the war versus inflation is hardly won. And that fact will keep rates rising and stock markets both volatile and likely capped with far more risk of disappointment than elation in the months to come.

Lastly and ominously, rental inflation jumped to 5% year-on-year, the highest since April 1991.

This relates to a theme we have discussed for over a year: a hot housing market eventually feeding through to dramatically higher rents.

But the worst detail from this week's report was on another topic:

  • The key question isn't just what happens to inflation. It is what happens to wages at the same time as elevated inflation.

In this respect, the most important news from the CPI report was how wages are lagging further and further behind. There is very simply no wage increase spiral. Rather, there is instead just a six-month -5.4% contraction in real average weekly earnings.

Now this is good in the sense that it will help keep a lid on inflation in the future but it is very bad in the immediate because it means that real workers are watching their real wages rapidly erode.

Incredible, this type of real wage contraction has only happened in the past with an outright economic recession and will make for very grim reading in Washington, DC and beyond.

It is all very fine and well to blame Vladimir Putin for high prices but people's standards of livings are declining and they know it.

This deterioration is causing politicians and policymakers of all stripes to cast around for solutions, even radical ones, to at least appear like they are trying to do something.

One such solution that has been getting increasing press is the next story.....


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