Wall Street Tries To Digest Another Positive Inflation Report
An inflation report released by the U.S. Bureau of Labor Statistics (BLS) on Thursday showed the pace of price hikes for consumer goods and services in the U.S eased but remained elevated, well above the Fed's target.
The Consumer Price Index (CPI), a measure of retail or consumer-level inflation, slowed for a sixth consecutive month at an annual rate of 6.5%, down from 7.1% in November, the lowest since October 2021. That's thanks to the easing in the price hikes of food and energy -- the two critical drivers behind the inflation spike since the end of the pandemic -- and the easing of used car prices.
Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Greenwich, Conn-based Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, sees no surprise in the December inflation numbers discounted by recent action in the debt and equity markets.
James Bentley, Director of Financial Markets on Line, agrees. "No nasty surprises today. Inflation is making all the right noises for stock bulls, with expectations coming in bang on the money. However, it's clear the indices found themselves at a bit of a crossroads this week," he told International Business Times.
Thus, the subdued response of Wall Street following the BLS report. Still, Davis thinks an annual increase in the Consumer Price Index of 6.5% is still quite elevated.
"Markets have remained confident the Fed will be able to control inflation, but that remains to be seen," she told IBT. "The Consumer Price Index is just one measure of inflation, and the Bureau of Labor Statistics calculates it with a large component being owner-occupied rent. Therefore, CPI is not the only way to measure inflation."
Jason Pride, CFA, Managing Director at Glenmede Trust Company, sees a mixed bag in the BLS report.
"Month-over-month core CPI came in higher than last month at 0.3%, while headline CPI declined," he told IBT. "Many cyclical subcomponents driving CPI to appear to be headed in the right direction, with energy down 4.5% and used cars/trucks down 2.5%. However, portions of the core index, such as core services, exhibited inflation's stickiness."
The Fed has pointed to "services less rent of shelter" as a critical subcomponent to watch; this item accelerated to 0.4% during the month.
What does this new inflation report mean for the next policy move by the nation's central bank? Most likely, a downshift in interest rate hikes from 50 basis points to 25.
"With an FOMC meeting on the horizon, today's mixed CPI report likely makes for an interesting debate over the benefit of a 50bp or 25bp rate hike," said Pride. "The market was mixed between the two outcomes before the release and likely will remain there after this report."
Still, Pride warns investors to avoid getting too excited about the prospect of slower rate hikes, as they aren't the same as rate cuts. "Year-over-year core consumer inflation is still far from the Fed's price stability goals, and the 1970s provide case-in-point as to the risks of claiming victory on inflation too early," he explained.
"The Fed will likely need to keep monetary policy on a restrictive footing into the new year and perhaps even through a sizable chunk of 2023 before it can be confident that the inflation scourge is squashed. In the meantime, the U.S. economy continues to face material risks from tight monetary policy, with the likelihood of recession elevated heading into the new year."
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