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Market Update

CPI hits 30-year high

November 15, 2021
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    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


After notching weekly gains and setting all-time highs for nearly six consecutive weeks, the major U.S. equity indices took a breather. While Treasury yields moved markedly higher as investors digested the latest economic news, particularly the Consumer Price Index release, and comments from Federal Reserve Officials.

Economic data

  • In a light week for economic data releases, the Producer Price Index (PPI) and the Consumer Price Index (CPI) headlined the economic calendar as market participants dissected the latest inflation reports attempting to determine how long elevated price pressures will remain.
  • While the Fed maintained that price increases are expected to be “transitory” at the latest FOMC meeting, the oft-bemoaned supply chain disruptions and robust consumer demand showed no signs of letting up in October.
  • According to Tuesday’s PPI release, wholesale prices rose 0.6% over the month, bringing the yearly total to an attention-grabbing 8.6%, the highest reading in the series’ history.
    • Over half of the monthly increase was driven by higher goods costs which rose 1.2%.
    • Pickups in truck freight costs and gasoline prices also contributed to the move higher.
    • Comments from industry professionals included in the report highlighted the inflationary-pressure-inducing factors that have contributed to elevated prices in 2021, namely raw material and labor shortages and transportation bottlenecks.
  • Wednesday’s CPI release dominated investors’ attention and sparked a sell-off in the Treasury market when it was reported that consumer prices rose 6.2% in the last year, the highest reading since November 1990.
    • While rising energy prices have been a hot topic in the broader media, the core CPI measure, which excludes the often-volatile food and energy prices, rose a still strong 4.6% in the last year, a level not seen since the fourth quarter of 1991 and an indicator that the price increases currently seen in the U.S. are broad-based and not limited to specific goods and services.
    • Predictably, much of the commentary included in the report focused on the same talking points that the PPI release mentioned, namely transportation bottlenecks and raw materials shortages.
    • While the persistence of these elevated prices remains unknown, many analysts have suggested that the supply chain disruptions and strong consumer demand that have been heralded as the major drivers of inflation this year will likely persist into 2022, continuing to put pressure on future PPI and CPI releases.

      Fed speak

      • While many Federal Reserve officials, including Federal Reserve Chair Jerome Powell, held speaking engagements throughout the week, President of the San Francisco Federal Reserve Mary Daly garnered much of the week’s attention as she spoke about the state of the U.S. economy, her thoughts on inflation, and where she sees interest rates headed in the next few years in an interview with Bloomberg Television on Wednesday.
      • Daly, a voting member on the FOMC and often characterized as one of the FOMC’s most dovish policymakers, conceded that the price increases seen this year are “eye-popping,” but that, “it would be premature to start changing our calculations about rising rates.”
      • Federal Reserve Vice Chair Richard Clarida echoed a similar sentiment last week, commenting that rate hikes are “a ways away,” but did note that he expects that the economic and labor conditions that would warrant an increase to the target range, “will have been met by year-end 2022.”
        • Following Wednesday’s CPI release, expectations for the first increase in the target range have moved forward to July 2022 with the market currently expecting two 25 basis point rate hikes in 2022.

        Interest rates

        • Interest rates volatility continued last week as expectations of higher inflation drove Treasury yields across the curve higher.
        • Mid-term rates saw the greatest increases with the five-year Treasury yield rising 20 basis points over the week to 1.24%.
          • Much of the increase was driven by a move up in inflation expectations with the five-year breakeven inflation rate rising approximately 23 basis points over the week to 3.12%.
          • While inflation has been the source of much debate and consternation for much of the year, expectations for inflation in the medium-term have risen considerably in the fourth quarter alone with the five-year breakeven inflation rising roughly 60 basis points since the start of October.
        • Curve steepness, as measured by the 2s/10s basis, remained constant over the week, but the outsized rise in the three to five-year part of the curve has resulted in a flatter curve structure week over week.
          • The relative compensation associated with the execution of a five-year receive-fixed interest rate swap increased significantly week over week.
            • As of Friday’s close, positive carry at the five-year point sits at 101–111 basis points depending on the index.
          • The recent pick-up in rates has increased hedging conversations on our desk with liability-sensitive clients looking to protect against further rate increases, while our asset-sensitive clients look to monetize the current shape of the curve and receive income for protecting against a pull-back in interest rates.

          Financial institutions buy fewer bonds in the third quarter

          • Many financial institutions have released third quarter results in the last month.
          • According to S&P Capital IQ, Banks over $50 billion added fewer securities to the investment portfolio in the third quarter as many financial institutions sit on the sidelines waiting for higher interest rates.
            • Looking at commentary from the largest U.S. banks, many indicated a desire to stay patient when investing in the securities portfolio but highlighted that the recent pick-up in yields at the end of the third quarter and throughout the fourth quarter thus far, has created more attractive opportunities to deploy their excess liquidity.
          • Financial institutions have expressed an expectation that demand for the primary alternative to securities investments, loans, will increase in the coming quarters.
            • To that end, Bank of America CEO Brian Moynihan expressed growing optimism for an uptick in commercial loan demand and indicated that the bank is prepared for that increase in demand because, “we’ve invested in hundreds of relationship managers in our commercial lines of business.”

                The look forward

                Upcoming economic data releases

                • Empire Manufacturing Index – Monday
                • Retail Sales – Tuesday
                • Industrial Production – Tuesday
                • Housing Starts – Wednesday
                • Jobless Claims – Thursday
                • Philadelphia Fed Business Outlook Survey – Thursday
                • Leading Index - Thursday

                  Upcoming Federal Reserve Speakers

                  • Barkin, Bostic, George, and Daly – Tuesday

                  • Williams, Bowman, Mester, Daly, Waller, Evans, and Bostic – Wednesday

                  • Bostic, Williams, Evans, and Daly – Thursday

                  • Waller, Clarida – Friday

                    Rates snapshot

                    Market implied policy path (Overnight indexed swap rates)

                    Source: Chatham Financial

                    About the author

                    • Bill Smith

                      Associate Director
                      Balance Sheet Risk Management

                      Financial Institutions | Kennett Square, PA


                    Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

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