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Dow Future stumbled to a multi-day low around 33983 early Asian Tuesday on stagflation concern as inflation expectations soared. Fed officials are increasingly sounding cautious about inflation and indicating earlier than expected tightening. On Tuesday, Bostic became the first regional Fed president to publicly disagree with the Fed’s narrative about ‘transitory’ inflation.
On Tuesday, Atlanta Fed’s President Bostic brought a jar with him to his speech on the inflation outlook. On the jar was a label marked with the word ‘transitory’. Bostic explained that at his bank the word had become a ‘dirty word. Boston argued every time someone used it, he or she has to put a dollar in the jar. It would be better to describe inflation as ‘episodic’.
· You’ll notice I brought a prop to the lectern---It’s a jar with the word ‘transitory’ written on it. This has become a swear word to my staff and me over the past few months. Say ‘transitory’ and you have to put a dollar in the jar
· The pandemic has turned inflation on its head. The elevated inflation dynamics today are very different from what they were in the months before the pandemic
· He and the Atlanta Fed believe that ‘episodic’ better describes pandemic-induced price swings than ‘transitory’
· By this, he means these price changes are tied specifically to the presence of the pandemic and will eventually unwind by themselves.
· Points out, though, that it is becoming increasingly clear that the intense and widespread supply chain disruptions that have animated price pressures will not be brief
· Believes the real danger is that the longer the supply bottlenecks and attendant price pressures last, the more likely they will shape the expectations of consumers and businesspeople, shifting their views on pricing and wages in particular
· Stresses that one of the overarching themes of the Federal Open Market Committee is data dependence. It is through this lens that he views flexible average inflation targeting or FAIT
· The episode is likely to be a particularly long one. The supply chain disruptions that are pushing up prices are unlikely to be brief. As a result, inflation will keep coming on strong. The big risk is that this could unleash a wave of inflation expectations in households and businesses that, in turn, could provide the fuel for even more inflation
· Believes current conditions argue for the removal of the Committee's emergency monetary policy stance, starting with the reduction of monthly asset purchases
Talking about inflation expectations, on Tuesday, the NY Fed data shows that the U.S. inflation expectations for one year ahead (2022) jumped further to +5.3% in September, the eleventh consecutive monthly increase and a new series high since the inception of the survey in 2013.
Now from inflation expectations to actual inflation, on Wednesday, the BLS data shows that CPI edged up +5.4% in September, at a 13-year high from +5.3% in August, just above market expectations of +5.3% (y/y). The annual/yearly CPI was boosted by the higher cost of shelter, food, new vehicles and energy. On the other hand, prices eased for used cars and trucks; transportation services; apparel; and medical care services. On a sequential (m/m) basis, U.S. headline CPI advanced 0.4%, above last month/forecasts of 0.3%, with the indexes for food and shelter contributing more than half of the monthly increase. The core CPI went up 0.2% sequentially and 4% yearly, unchanged from August and in line with market expectations.
On Wednesday, after the CPI data, the FFF rate shows one rate hike by Sep’22 from earlier Dec’22. But the trend of CPI, core PCE may prompt Fed for two rate hikes in 2022 (Sep and Dec) to stay ahead of the inflation curve.
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