If the consensus holds true, the US will find itself amid a steep and persistent recession as it did in the early years of the Reagan administration when the inflation was this high. The Labor Department is set to reveal the consumer price index for November to measure the cost of numerous items on Friday morning. The index includes common goods like ground beef and gasoline and also goes on to cover detailed purchases like indoor plants and flowers, frozen vegetables, and pet supplies.
Wall Street is predicting the index to reflect a 0.7% gain this month, translating to a 6.7% jump from a year ago, considering the Dow Jones estimates. Except for food and energy, the so-called core CPI is estimated to rise 0.5% monthly and 4.9% annually. If those estimates are right, it will turn out to be the highest reading for headline CPI since June 1991. The index surpassed 7% after topping out over 14% in March and April 1980, setting a new record.
Jumping inflation is not news. In recent months, investors have witnessed various data points jump to their highest in decades. Some economists also think the headline jump could exceed 7%.The market will pay heed to the hot levels of inflation and the reactions it would trigger from the Federal Reserve.
Tom Graff, head of fixed income, Brown Advisory, believes it won’t be good for stocks. The most probable reason for stocks to correct in the coming months would be that inflation growing problematically will lead the Fed to get aggressive sooner.
Fed on tap
The Fed has already started towards inflation and will soon do more. The central bank will likely speed up the pace of withdrawing economic support at its meeting this week. Meaning, it is expected to double the taper in bond purchases to $30 billion per month.
This will bring an end to the program that witnessed $120 billion monthly in purchases by March 2022. If inflation continues to be a concern, the Fed could start raising interest rates. Everyone is aware that the numbers around inflation are going to be really hot. But according to Graff, if it happens to come above consensus, especially on the core, it will be a new challenge for the Fed to accelerate tapering and also consider hiking earlier in the next year.
With current market pricing, the Fed can enact its first 25-basis point rate hike in May or June. According to the CME’s FedWatch tracker, there’s roughly a 61% chance of three hikes striking by December. Steven Blitz, TS Lombard chief US economist, believes that the Fed’s first hike is likely to come in March, and tapering will end in the same month.
The timing is being preponed as the conditions required to start a rate hike cycle that was expected to come in a year back are advancing with incredible speed, noted Blitz. Blitz also clarified that their call is not related to the recent shortage-related price hikes but to inflationary processes like wages taking hold and the Fed Open Market Committee realizing it much later that they have a lot of catching up to do.
The Fed in the coming week is unlikely to commit too much to rate spikes next year. However, it will update its economic forecasts and likely pull forward the increases. At the September meeting, the committee forecasts indicated a little tilt towards one increase in 2022. But as the CPI is coming ahead of the Tuesday-Wednesday meeting, a hot reading will make ignoring the surging inflation challenging for policymakers.
Veronica Clark, the Citigroup economist, wrote that a more substantial print could potentially create a more powerful sense of urgency for the Fed to react to higher inflation through potentially earlier rate hikes.