What’s going on with inflation?

Is the die cast? The futures market seems to be pricing in a 90%+ chance that the Fed hikes by 25 basis points next month, it’s last meeting of the year. Yellen & Co don’t seem to be out there playing down the odds of a hike this time. Financial stocks have exploded higher, in part as a reaction to the rising 10-year yield and in part due to market expectations of a December move.

Here’s Peter Boockvar on the most recent inflation data:

Headline CPI in October jumped by .4% m/o/m but as expected and this brings the y/o/y gain to 1.6%, the highest since October 2014. Energy price gains on a y/o/y basis is the main reason as they have accelerated due to easy comparisons. Food prices were flat m/o/m but down .4% y/o/y confirming the food deflation we’ve heard from supermarket companies. The core rate was up just .1% m/o/m, one tenth less than expected. The y/o/y gain was 2.1% vs 2.2% in the month prior. A factor in the m/o/m slowdown was that there was no change in medical care costs but that comes after large gains in previous months and the y/o/y rise is still 4.3%. Rent gains are still robust as they rose .4% m/o/m and 3.8% y/o/y. Owners equivalent rent, the faux look at rent, was up by .3% and 3.4% m/o/m and y/o/y respectively. Rent gains are moderating in NY and San Francisco but still remain strong in other areas. Also, if the rise in interest rates continues, expect more households to choose to rent. As for overall services ex energy, prices rose another .2% m/o/m and 3% y/o/y continuing the trend of sticky services inflation.

Bottom line, I continue to expect headline inflation to move higher in coming months due to the base effect of energy prices and combine this with stubborn services inflation and the now growing possibility of higher wages and a fiscal jolt to the US economy and interest rates are likely to continue shifting higher.

Josh here – that would mean we’re at a pace of one 25 basis point hike per year. The very definition of measured and deliberate. Markets have begun to price in a higher possibility of two hikes next year, but markets have been ahead of themselves for years.

Source:

Peter Boockvar
Managing Director, Chief Market Analyst
The Lindsey Group LLC

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