Consumer Price Index: Key Focus This Friday

Consensus is calling for a headline number of +6.8% but estimates range as high as nearly +8%. Investors will be closely scrutinizing underlying details for signs that price gains are starting to look more permanent. This would be most evident in the so-called “core” rate that strips out food and gas prices.

After moderating somewhat this summer, the gauge made a substantial jump in October, indicating prices are climbing for a more broad range of consumer goods that are unlikely to be rolled back.

Inflation

The current wave of inflation is being fueled on several fronts, but primarily economists blame a lack of supply to meet booming consumer demand for goods. Some equate it to the same type of supply-demand mismatch witnessed following World War II when Americans were in the mood to spend but wartime rationing had left many products in short supply.

By 1947, inflation had jumped to over +20%. However, by the end of 1948 it was hovering just over +8%, and less than a year later the economy had flipped into deflation.

Some economists argue the resulting recession of 1948-49 was due to the central bank adopting policies to fight inflation even as it had already begun declining on its own. This is an example from history that more bulls have been citing in their arguments cautioning against the Fed moving too fast as it looks to curb the current bout of rising prices.

What that period did not have was the labor shortage that American businesses face today. Many bulls believe the currently fierce demand for workers is largely driven by pent up consumer demand that will likely begin to fade next year. There are concerns that the issue is a more fundamental shift that proves to be permanent, though, which could keep wage pressures in place longer-term and present a whole different set of problems for the Federal Reserve.

Data to watch

Next week, the central bank is expected to announce plans to accelerate the pace of its asset “taper” which would in turn move up the timeframe for interest rate hikes to begin. What bulls really want to see is assurances from the Fed that they will remain flexible and willing to adjust policy if the economy shows signs of stumbling.

The two day policy meeting concludes on Wednesday, 12/15, and will be followed up by a press conference by Fed Chair Jerome Powell. The central bank will also publish new economic projections which will include inflation forecasts and median range interest rate projections, aka the “dot plot.”

The previous September forecast projected the Fed’s short-term interest rate target at +0.3% for 2022, +1.0% for 2023, and +1.8% for 2024.

Other data set for release next week includes the Producer Price Index on Tuesday; Retail Sales, Empire State Manufacturing, Import/Export Prices, Business Inventories, and the NAHB Housing Market Index on Wednesday; and Housing Starts, the Philadelphia Fed Index, Industrial Production, and IHS Manufacturing on Thursday.

Next week also brings central bank policy updates from Bank of England and the European Central Bank on Thursday.

On the earnings front, next week’s highlights are Adobe, FedEx, and Rivian, all of which release results on Thursday.

Overall, I still think there could be more extreme volatility and downside risk into next week’s Fed meeting so I have a few short hedges in place. I suspect once we get past the Fed meeting and any possible knee-jerk there might be a more clear path for the bulls to run into yearend.