The Weekly Wire: Is That A Light At The End Of The Inflation Tunnel?

As long-time economic and market observers we appreciate that a single data point does not a trend make; but we also appreciate that any change in trend does take place at an inflection point (i.e., a single data point; of course, that change in trend is only obvious with additional data points and hindsight). With that said, we are focusing this week on a single data point, one that ties back to a topic key to the outlook for monetary policy and, in turn, the outlook for the economy and markets into 2022.

Working backward, that topic is inflation and that data point is the August Consumer Price Index, released by the Bureau of Labor Statistics on September 14. The August CPI was up 0.3% on a seasonally adjusted, month-to-month basis, a slower rate of change than the 0.5% increase in July and well below the 0.9% increase in June, and the smallest rate of change since February. Over the last 12 months, the CPI increased 5.3%, less than the 5.4% rise for the 12 month period ending in July. So, the CPI in August on both a month-to-month and a year-over-year basis ticked down from its most recent readings.

The Federal Reserve believes the recent spike in inflation will prove to be transitory; while, again, one data point does not a trend make, the most recent CPI data, we think, bolsters the Fed’s transitory case and gives our Central Bank, at least for now, a bit more wiggle room when it comes to the tapering of its monthly securities purchase program. Monetary policy has been exceptionally supportive of economic growth and risk assets. A more benign inflationary environment would enable the Fed to remain very accommodative.