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Blockbuster CPI Above Expectations, Fed Not Worried (Yet), Stock Markets Tumble

Today’s CPI report was expected to indicate an annual increase of about 3.6%. The actual number at 4.2% is the highest annual increase since 2008. The monthly gain of 0.9% in core CPI was the highest since 1981. Stock markets sold off yesterday afternoon on nervous anticipation of the report and then sold off big today after the release. The Dow and S&P indices were both down around 2% today. Fed and Treasury officials referred to it as a “single data point” and labeled it as “transitory”. However, investors recall the runaway inflation of the late 70s and the consequences of the bitter pill of skyrocketing interest rates prescribed by the Fed in the early 1980s. The 10 year T sold off with the yield hitting 1.70%, 20 bps above last Friday’s opening of 1.50%. The next critical level is 1.77%, the post pandemic era high from late March. The CPI report showed some major price increases in certain sectors: 21% for used car and truck prices (10% in the last month alone), energy prices jumped 25%. Shelter (rent) was up 2.1% year over year. Many commodity prices hitting recent highs include: lumber, steel, copper, semiconductors, corn, poultry, etc. Meanwhile, there is “unbalanced employment” as shortages of workers are affecting industries that are re-hiring due to pent up demand. The Fed policy makers are touting the “base effects” of the inflation numbers that won’t play out until July/August (March-June 2020 numbers were crushed during the initial shutdowns). Issues such as inefficient supply chains, worker shortages stem from the sudden pandemic recovery for which there is no precedent. Still, every data point for the next few months will be endlessly analyzed for the answer: real or transitory? High rates or low rates? How will the cost of capital affect asset prices? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners