Score One for Team Transitory


Chief Strategist at Interactive Brokers

This morning, the highly anticipated Consumer Price Index (CPI) for August was released.  Traders and investors are keenly focused on any inflation statistics because the Federal Reserve has told us that the return of sustained 2% inflation, alongside a return to full employment, is a key factor in its decision whether to maintain monetary stimulus.  Even though CPI is not the Fed’s preferred inflation measure – they prefer the Personal Consumption Expenditures price index (PCE) – CPI is the most widely followed measure by the public.  It is built into many employment contracts and Social Security payments.  We can argue whether it is the best measure of inflation, but it is what comes to mind for most of the public [1].

Chair Powell has been asserting that many of the worst inflationary pressures are transitory, meaning that they are prone to reverse if circumstances change.  Once he put the concept of “transitory” into the financial zeitgeist, investors have been poring through inflation statistics in the hope of getting clarity about whether price increases are likely to ebb, reverse, or persist.  We wrote extensively about this topic two months ago, and here we are doing it again.

Here are today’s numbers:

We see that all the relevant numbers declined from last month, and most came in below expectations.  Although this is just a single data point, the signs are encouraging to those who are concerned about inflation.

Why then do we see a lackluster response from equity markets today?  If we were seeing truly transitory inflation, that would bode well for a market that appears fully dependent upon continued monetary accommodation.  The problems are these:

  • It is indeed a single data point
  • Some of the causes for the monthly decline were in sectors like travel and tourism that could be taking a hit because of Covid fears
  • The numbers are still relatively high.  Remember, the Fed wants to see persistent 2% inflation, not 5%
  • Markets have been generally lackluster, and we have seen a new pattern where early rises in stock prices are a trigger for profit-taking rather than the base for an afternoon rally
  • The 6 basis-point rally in 10-year treasury prices may be signaling economic woes rather than strictly enthusiasm about lower inflation

So, we can score this round for the transitory team.  But today represents merely one inning in a very long game.

[1] CPI is sort of like the Dow Jones Industrials Average (INDU) in that it is the most widely quoted measure in general media, except for the fact that CPI is actually utilized in the real world while INDU is not.  Very little money is indexed to INDU while millions are indexed to CPI.

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