The 10 year T jumped 12 bps today (closing at 1.57%) as inflation is increasingly being perceived as more than “transitory”. Breaking down today’s CPI report shows some more persistent inflation signals that will most likely continue into 2022. The headline number of 6.2% annually was the highest in 30 years. Analysts were expecting about 5.9%. The monthly number was 0.9% (expectations were 0.6%). Core inflation was also the highest in 30 years at 4.6% annually. Food and energy prices are up significantly. Shelter costs, driven by higher rents, increased 0.5% for the month. The shelter metric is another example of the “stickiness” of this wave of higher prices. Treasury Secretary Janet Yellin struck a dovish tone. She again said that policymakers expect price increases to settle down in 2022 (to acceptable levels of about 2.0%). However, she pointedly added that if inflation turns out to be “endemic”, the Fed “would have a role to play to keep it under control”.
St Louis Fed President Brainerd remarked last night that he sees two interest rate hikes in 2022. The Fed futures market is now predicting 2 rate increases for 2022 and a 44% likelihood of a 3rd hike. Not a great day for Treasuries as an auction of 30 year bonds went poorly pushing that rate to 1.94%. Inflation expectations as measured by the 5 year “breakeven” rate jumped to an all time high of 3.113% (the difference between the treasury yield and the inflation protected security of the same term. It is a key indicator of investor expectations of inflation) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners