The Consumer Price Index (CPI) readings have become a top topic as of late and have directly impacted market movements and overall sentiment. These CPI reports are becoming more significant as these readings are used to identify periods of inflation. More robust the CPI readings will translate into a stronger influence on the Federal Reserve’s monetary policies. The Federal Reserve is reaching an inflection point where they will need to curtail their stimulative easy monetary as inflation, unemployment, and overall economy continue to improve. As a result, their long-term monetary policy of low-interest rates and bond purchases will inevitably need to pivot to a scenario of higher rates to tame inflation. As a result, investors can expect increased volatility as these critically important CPI reports continue to be released through the remainder of 2021. Additionally, any notion of higher rates may spur investors to reduce exposure to equities.
CPI Market Jitters
Recent CPI readings have spooked the markets as these serve as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Moreover, the prospect of rising rates may introduce some systemic risk in the process. The confluence of rising rates, a hot housing market, and robust CPI readings may translate into real inflation rates that exceed the Federal Reserve’s target inflation zone. If these real inflation excursions drag on, these higher rates will be in the fold.
The CPI is an important economic readout as this is a measure of price changes of a basket of consumer goods and services used to identify periods of inflation. Mild inflation can encourage economic growth and stimulate business investment and expansion. High inflation reduces the buying power of the dollar and can reduce demand for goods and services. High inflation also drives interest rates higher while driving bond prices lower. Comparing the current cost of buying a basket of goods with the cost of buying the same basket a year ago indicates changes in the cost of living. Thus, the CPI figure attempts to measure the rate of increase or decrease in a broad range of prices (i.e., food, housing, transportation, medical care, clothing, electricity, entertainment, and services). As CPI numbers catch fire and remain elevated, the Federal Reserve will need to act to tame any runaway inflation, especially in a red-hot economic expansion that we’ve witnesses post-pandemic.
CPI reports are becoming more significant as these readings are used to identify periods of inflation. The recent CPI readings are resulting in a much stronger influence on the Federal Reserve’s monetary policies. Investors are speculating on whether the Federal Reserve will curtail their stimulative easy monetary as inflation, unemployment, and overall economy continue to improve. Inevitably, low-interest rates will not be here indefinitely, and bond purchases will need to subside, thus pivoting to a scenario of higher rates in the intermediate term. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed when rate hikes are deemed on the horizon. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market and introduce some systemic risk in the process. As a result, investors can expect increased volatility as a function of key economic data, specifically the CPI readings.
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One thought on “Market Jitters And The Consumer Price Index (CPI)”
My thinking is the next big bailout for the Fed/Congress will be triggered by a corporate debt crisis and collapse of the Zombie Companies that are legion today. The Fed will likely lose whatever independence remains between itself and the Treasury Dept. Perhaps we should call this new Government entity the Ministry of Plenty in honor of George Orwell and his prescient novel “1984”. Or as Orwell’s character Winston Smith saw it while working his day job:
“But actually, he thought as he readjusted the Ministry of Plenty's figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another. Most of the material that you were dealing with had no connection with anything in the real world, not even the kind of connection that is contained in a direct lie. Statistics were just as much a fantasy in their original version as in their rectified version. A great deal of the time you were expected to make them up out of your head.”
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