Underlying inflation down, but lagging CPI risks a severe recession
Underlying inflation down, but lagging CPI risks a severe recession
Key points:
Whilst I continue to expect that June was the likely high water mark for YoY CPI growth, given a low prior comparable, headline CPI remained high in September (+8.2%).
As flagged in my September CPI preview, YoY core CPI reached a new peak of 6.6% for the current high inflation cycle, as the CPI’s lagging measurement of rents continues to play catch-up to actual spot market rents.
Durables prices plunged 1.1% MoM, and could fall to annual growth of LESS than 2% by January 2023.
Spot market rents continue to diverge significantly from lagging CPI rental indexes. After significantly UNDERSTATING inflation since May 2021, the CPI is fast approaching the point where it will begin to OVERSTATE underlying inflation.
Just as the lagging CPI and its understatement of inflation contributed to the Fed being too lackadaisical about inflation as it continued for far too long with its extremely loose monetary policy, the reverse of this scenario risks the Fed significantly overtightening …