Please don’t pivot

The Federal Reserve’s recent attempt to check inflation has been somewhat successful and some macro factors have also gone its way. This morning’s CPI bolsters the case that falling gas prices are helping to ease the overall situation. The inflation rate for housing, rent and employment, however, remains stubbornly high.

U.S. inflation was 8.5% in July, the Labor Department said Wednesday, holding close to its highest annual rate in four decades despite easing energy costs.

U.S. inflation eased slightly but remained close to a four-decade high in July despite cooling energy prices.

The Labor Department on Wednesday reported that the consumer-price index rose 8.5% in July from the same month a year ago, down from 9.1% in June. June marked the fastest pace of inflation since November 1981. The CPI measures what consumers pay for goods and services.

Core CPI, which excludes often volatile energy and food prices, held steady in July, increasing 5.9% from the same month a year ago, a sign that broad price pressures remain in the economy.

On a monthly basis, the CPI was flat in July after rising 1.3% the prior month, the result of falling energy prices such as gasoline. The core-price index climbed 0.3% last month, down sharply from June’s 0.7% gain, but slightly higher than the average monthly gain of 0.2% in the two years before the pandemic.

Source:

CPI Report: Inflation Eased in July (WSJ)

Ok, good news. We’re cooling down. The acceleration has slowed and the headline number is rolling over. Progress. But this is no time for market participants to be sniffing out a Fed pivot. No one should be rooting for “less hawkish rhetoric.” Or the end of the tightening cycle. Or the beginning of a new easing cycle. None of this would make sense at this juncture. The more the markets hold out hope for easing, the harder it will be to bring about the tightening of financial conditions required to actually tame inflation for the long-term.

This morning’s kneejerk reaction higher for stocks and bonds is nice for the investor class, but it’s somewhat counterproductive in the real world. Because inflation is sticky and higher stocks / lower borrowing costs help to keep it that way.

So please, Mr. Powell, don’t pivot. Not yet.