Labor market imbalances are fueling a persistent rise in inflation
Median CPI hitting new highs means inflation has not peaked
Equities will need to reckon with more Fed tightening and higher bond yields
Surging inflation over the past year has always been about more than just planes, trains, and automobiles - how much they cost to purchase and how much they cost to operate. Too much of the focus has been on the inflation outliers like the spike & cooling in used car prices or the surge and collapse in gasoline prices. Those are post-COVID talking points, but not really drivers of the underlying trend in inflation. So while headline CPI and (to a lesser extent) core CPI get the headlines, median CPI continues to trend higher, as it was doing pre-COVID and as it has been doing in recent months.
Imbalances in the labor market are driving this trend - which suggests that getting inflation under control will be inconsistent with a soft-landing for the economy. This isn’t just about tolerating a recession, the Fed may need a recession to have a realistic shot at getting inflation back to more benign levels. For the financial markets, this means more tightening from the Fed and higher bonds yields than a generation of investors have ever seen. The market’s resiliency in the face of sharp and persistent increases in yields is likely to be tested.
