The Weekly Wire: "It's Like Déjà Vu All Over Again"
The August Consumer Price Index report showed higher-than-expected inflation, particularly in core areas like rents, autos, and food costs, leading to a sharp stock market selloff reminiscent of the reaction to the May CPI data, raising concerns about further aggressive Federal Reserve interest rate hikes.
Last week’s August Consumer Price Index release – and the stock market’s reaction to it – got us thinking of a famous quote from Yogi Berra, “It’s like déjà vu all over again,” which was how the New York Yankee great explained how events tend to repeat themselves. Unfortunately for investors, the market’s response to the hotter-than-expected August CPI data repeated its response to the hotter-than-expected May CPI data, with stocks moving sharply lower. You will recall that the May CPI report, released on June 10th, showed headline inflation running at 8.6%, the highest since 1981, and core inflation – ex-food and energy – running at 6%, year over year, both readings above Wall Street’s estimates. You will also recall that report pushed the Fed to raise the Fed Funds Rate by 75bps at its June meeting, its largest interest rate hike since 1994. The May CPI data and the very hawkish response from the Fed were primary contributors to a 13% move lower in the S&P 500 through late June.
That written, as we moved through summer and got increasing evidence that inflation had peaked, US stocks rallied, and the S&P 500 stood 13% higher than its late June low heading into the release of the August CPI on September 13th. Unfortunately, that report revealed year-on-year inflation up 8.3% and core inflation up 0.60% on a month-to-month basis, bigger increases than Wall Street expected. If anything, it was the core data that was most concerning, as the report showed pricing pressures broadening out beyond categories like energy to include rents and autos. We also learned food costs were up 11% year-on-year in August, the largest jump since 1979. As noted above, the August CPI data sparked a steep selloff on Wall Street, with the S&P 500 moving lower by more than 4% on the 13th, its biggest down day in more than 2 years.
Some think the latest CPI report will push the Fed to raise rates by 100bps this week. We don’t know what the Fed will do, but we do believe the August CPI reading has made its goal of tamping down inflation without putting the economy into a recession much more difficult. When it comes to the battle against inflation, as Yogi would say, “It ain’t over ‘till it’s over.”