From the desk of Willie Delwiche.
- 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.