US October Inflation: How High Can It Go?
Last week, the Fed acknowledged that inflation was higher than anticipated, and would likely stay that way for a while.
Many economists would argue they are late to the party. But the fact that the Fed finally came around could indicate that tomorrow’s CPI change data might have less of an immediate impact on the markets.
The idea is that with the Fed expecting higher inflation, the trajectory of monetary policy is unlikely to change if the inflation is in fact higher.
Nonetheless, that doesn’t mean that the underlying effects of inflation won’t go away. For example, if bond rates remain stable, the real yield of bonds would erode, and weaken the dollar.
It’s not just the headline number anymore
What investors are likely to be looking at following the release of inflation data isn’t how much, but why. It’s common knowledge that logistics aspects are having a broad range of price effects throughout the market.
The question is whether these are still temporary trends in relation to higher transportation and energy costs, or the price increases are starting to become entrenched throughout the whole value-added process.
An overlooked aspect of increased raw materials costs is how they have a magnified impact on the final product.
Price markup throughout the supply chain is usually done on a percentage basis, as companies try to defend their ROI. Essentially, a percentage in cost increase can be multiplied across several steps, leading to a significantly higher increase in the final product.
Unless price increases aren’t controlled throughout the whole supply chain, then prices will continue to rise for consumers.
Why volatility is back in focus
Generally, economists discount the ups and downs of volatile measures, such as energy costs, when analyzing the core inflation rate. That works fine in the short term.
However, if underlying prices are going up because of rising energy prices, then presumably the energy price growth will have to fall before the underlying trend is reversed. This means that as long as the headline inflation rate remains above the core inflation rate, we could be looking at higher inflation in the future.
In that scenario, the headline inflation number might start to be more important to traders than the core one. Especially if the Fed is already pricing in the growing core rate when it comes to policy outlook.
What to look out for
Overall, it’s the annual figures that get the most attention from the markets.
Analysts expect the annual Headline CPI change for October to accelerate to 5.8% from 5.4% at the last reading. That would be the highest figure since early 2008, right before the sub-prime crisis. And if it’s any higher than that it would be the greatest number since the late ’80s.
Additionally, an increase in the inflation rate would break the “pause” in inflation acceleration that prevailed for the last four months.
The expectation for the annual Core October inflation rate is also to accelerate to 4.3% from 4.0% in September. The increase, in that case, wouldn’t be as dramatic. That’s because it simply returns to where it was in August.
Still, that’s not an auspicious trend for regulators who had up until quite recently insisted that inflation would be transitory.