Thoughts From The Divide – Sticker and Other Shocks

“Another surprise jump” 

Another month, another smoking CPI print. As this article from CNBC notes, “prices surged more than expected”, hitting 7.5% YoY, “the highest reading since February 1982”. The White House Press Secretary did, admittedly, give some advanced warning, telling reporters that they were expecting “a high yearly inflation reading in tomorrow’s data”. “Above seven percent, as I think some are prediction would not be a surprise”. President Biden also addressed the tenacious numbers, saying his administration would use “every tool” to tackle the problem and reiterated that forecasts expected inflation to “ease substantially” into the end of the year. 

Looking at the underlying data, price pressures were broad-based. Core hit 6%, and the usual suspects continued their streak of perky YoY readings, with energy costs hitting 27% YoY, new and used vehicles rising 12.2% and 40.5%, respectively, and food up 7% over the past year. Even OER, whose finicky nature we’ve discussed before, rose 4.4% and seems poised to climb even higher given the latest rent and home price information from Zillow. The strength of the housing market does have its downsides. As a recent article from Fannie Mae explains, “affordability constraints continue to weigh on the housing market” as “a survey record-low 25% of respondents reported that it’s a good time to buy a home” as consumers “reported greater concerns about job stability and the future path of mortgage rates”. Admittedly, if consumers mentally link rent and other bills together, it may come as no surprise that moods are souring. As this article notes, like the folks in the UK seeing their telecom bills hop, skip and jump higher, some New Yorkers are seeing “increases of up to 300% in their gas and electric bills this month” thanks to “current global events”. 

Given recent headlines, vehicle prices may also not cool off quite as much as consumers and policymakers might hope. Following Ford’s announcement that it was halting some vehicle production as “the global semiconductor shortage continues to affect… [its] North American plants”, Ford and several other automakers reduced production at Canadian and or US plants this week due to shortages caused by the Canadian truck blockade.  

Policy Response 

St. Louis’s Bullard took to the airwaves following the release of the latest CPI to backtrack his earlier comments about 50-bps hikes to say that he’d “like to see 100 basis points in the bag by July 1”, and went further, pointing out that “there was a time when the committee would have reacted to something like this [morning’s CPI] to having a meeting right now and doing 25 basis points right now”. As to the idea of QT, Bullard said that “as a general principle, I see no reason why you can’t remove accommodation just as fast as you added accommodation”, given the latest CPI print. Bullard even went as far as to ponder asset sales, saying, “I would very much like the committee to consider that as a possibility, so we can do that if we need to”. 

Meanwhile, the BoJ is taking a different approach to getting its bond market where it needs to be, announcing a fixed-rate operation on its website earlier today, to the tune of “Unlimited” amounts of 10-year JGBs at a yield of 0.25%. 

Time will tell if Mme Lagarde and friends at the ECB will respond as Italian bonds and others feel the sting of rising rates.