The Consumer Price Index, the most well known measure of inflation, climbed 6.8% over the last year through November, according to data released today by the Labor Department. While in line with economists’ consensus expectation, that’s the highest level since 1982. The “core” inflation reading, which excludes the more volatile food and energy components, also continued to climb and while substantially lower, at 4.9%, stood at a 30-year high. We believe inflation will peak relatively soon and see inflation starting to settle down as supply chain constraints loosen and the labor pool expands, but the key question is when?
“We expect the path for inflation over the next year is decisively lower,” said LPL Financial Asset Allocation Strategist Barry Gilbert, “but we may still push higher for the next 1-3 months. The most recent COVID-19 surge, the unknown threat from Omicron, and still restrained labor force participation do continue to cloud the outlook and the Federal Reserve is watching.”
As seen in the LPL Chart of the Day, the core reading also continues to climb, although part of this continues to be the most COVID-impacted prices, such as new cars, used cars, and apparel, which in the current context aren’t acting very core-like. Rent inflation, the most important core element, is showing a pick-up but at a slower rate, climbing 0.4% in November and 3.5% year over year.
This report has been somewhat de-risked because of the market’s adjustment to nearly pricing in 3 rate hikes by year-end 2022. As a result we would not expect this report to meaningfully move rates or Federal Reserve rate expectations. The initial response from markets this morning was slightly bullish for both bonds and stocks. Some of the most hawkish market participants may find some comfort from an in-line report, but overall we do not think it changes the Fed’s thinking at this point.
Bottom line, we see a first quarter peak in inflation, Fed bond purchases to end in March/April, and liftoff potentially in September 2022. However, further progress balancing labor supply and resolution of supply chain disruptions that generate more persistent elevated inflation than we anticipate could potentially pull the Fed’s timetable forward.
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