The CPI Digest

Right so we're now at a 6 handle on US CPI - that's right, Y/Y CPI numbers came in at 6.2%. M/M was 0.9%. Remember the Fed's target is 2%, so we're a long way away from that - it's clearly true the inflation target has been met. 

This isn't quite as transparent as it first seems though. When we look at the drivers of increases we generally see that it was gasoline and food. Shelter is starting to play more of a role, but it's still only just picking up. SO then the question is does the Fed care about higher inflation prompted by gas prices? The answer to me still for now is probably no. 

Sure, it's higher than expected which is why the US yield curve has risen at the front-end as more hikes are priced in for next year, but longer term inflation expectations are relatively unchanged. The 10y Treasury yield has ticked up a few basis points, but the 30y is flat around 1.82%. This is particularly interesting to me at the moment since long-run growth expectations are for 2%, so why would the 30y be below this rate? 

Source: Refinitiv

Anyway, markets wise the flattening in the bond yield curve is interesting and shows that investors increasingly see hikes in the near term but still see terminal rates as very low. What does this tell us? Probably that inflation is transitory and the Fed just has to be careful not to make a policy error. In my view, what's the point of the Fed hiking twice and basically calling it a day? It might as well not hike at all. So, either the market is wrong about when the Fed is going to hike, to wrong about how many times they are going to hike. 

What's interesting is where the blame is being placed for inflation. The below graphic (stolen from Politico) shows a recent poll - clearly the blame is increasingly going to Biden. We've also had some relatively significant losses for Democrats in Governor races etc in the last week, and one of the key issues tapped is inflation.  

Source: Politico

Whatever happens, Americans just can't handle $5 a gallon for gasoline, so if Biden wants to have any hope of keeping control of either house at the midterms, he will need to get inflation under control.

I've had a couple of questions post report about gold; namely: "Inflation was higher than expected, doesn't this mean the Fed will hike quicker so should be bad for the zero yielding gold"? 

The answer to this before the print was well it depends on what real yields do. In a post the other day I had the chart below: 

Source: St Louis Fed, FRED

Sure, the 10y took a bit of a lift after the report (by 5bps or so at the time of writing), so the natural reaction might be to think gold should fall. However, the print was significantly higher than expected so real yields have actually declined! This is very important since as we can see there is a negative relationship to gold and real yields - this is gold acting perfectly as an inflation hedge. And anyone who followed my advice about longs above USD1835/oz... you are very welcome. I'm long all the way to USD1910 to here... wouldn't be surprised to see ATH within a couple of months now with this breakout!

Source: FxPro, cTrader

Please do hit me with questions on this... a difficult report to digest.