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Market Update

Inflation clouds begin to clear

August 16, 2021


Core inflation falls to its lowest level since March, the delta variant continues to create havoc, $550 billion in additional government spending is on the horizon, stock markets hit record-highs, and the 10-year treasury remains flat.


Inflation remains at the forefront of most economic conversations, but the narrative is shifting. For the first time since March, core month over month (MOM) inflation fell below 0.4%, according to the Bureau of Labor Statistics. Although that would still imply a 4.8% annualized rate, it is below the headline 5+% numbers the economy experienced over the last few months. More importantly, it could mark the start of a downward inflation trajectory, which is welcome news to many economists and citizens alike.

In previous newsletters, we highlighted energy, used cars and trucks, and shelter as key drivers of inflation. Combined, these three components account for roughly 76% of the headline 5.4% year-over-year (YOY) inflation increase reported Wednesday. If these three key drivers had no change in price over the last 12 months, the YOY inflation increase for July would have been roughly 1.3% instead of the reported 5.4%.


Despite their 12-month stronghold, the three key metrics, excluding energy, began losing steam in July. In fact, the three components increased MOM at just 1.6%, 0.2%, and 0.4% respectively. View the below comparison between June and July for reference.


As the three metrics, excluding energy, fell this month, other components of inflation picked up. The most noteworthy include crackers, bread, and cracker products (3.7%), women’s dresses (5.5%), lodging away from home (6%), personal care services (2.2%), motor vehicle repair (2%), vehicle accessories other than tires (1.4%), and pets and pet products (1.4%)

With products across multiple categories beginning to increase in price more rapidly, inflation clouds still hang over the economy. However, it appears that the summer sun is finally beginning to shine through and there is at least the potential for clearer skies ahead.

COVID-19 cases

The COVID-19 delta variant continued to create havoc across the nation last week, particularly in the south. The national, 7-day average case count was roughly 120,000 as of Friday. It has not been that high since February. Mask mandates are beginning to re-appear in some states, while other state governors are forbidding them in public institutions, such as schools. Although COVID-19 deaths have not spiked as severely as cases, they are rising. Last week, on average, roughly 550 Americans died each day because of the virus.

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Infrastructure bill

The senate bridged the divide this week with a bipartisan $1 trillion infrastructure bill. The final vote count included 19 GOP votes. Counterintuitively to the headline price tag, only about $550 billion is new spending. The rest is reallocated funding. House Speaker Nancy Pelosi and other House Democrats declared they would only put the bill up for a vote if the senate also passed another $3.5 trillion bill focused on social programs and family care. If the infrastructure bill is signed into law, it will provide state funding for public transit, airports, roads, bridges, electric vehicles, plumbing improvements, and more widespread broadband for the country.

After the $1 trillion infrastructure bill passed the senate and the inflation data was released, equities markets hit multiple all-time highs last week. The Dow Jones Industrial Average finished the week up 0.87%, the S&P 500 closed the week up 0.71%.

Apparently, equity investors feel, at least for the time being, the positive infrastructure and inflation news outweigh the growing COVID-19 infections.

Treasury yields initially spiked after both the infrastructure bill passed the senate and the Bureau of Labor Statistics released inflation data. However, the 10-year yield finished the week at 1.2970%, up just 1.52%. Treasury investors continue to walk a tightrope. On one side, they have COVID-19 cases and on the other they have inflation. If COVID-19 cases continue to rise, it would imply a more dovish reaction from the Fed. If this were the case, treasury rates should fall as potential Fed rate hikes get delayed. In this scenario, treasury investments should appreciate.

(Related insight: Read "Managing interest rate risk on future debt issuances")

On the other side of the tightrope, investors have inflation. If inflation continues to persist at high levels, it will either erode real treasury returns or encourage the Fed to raise their benchmark rate more rapidly to combat the inflation. In either scenario, treasury investors are worse off.

(Related insight: Read "Receive-fixed interest rate swaps: what corporates need to know")

Takeaways for corporations

For corporations looking to mitigate potential rate movements due to inflation, government spending, COVID-19, or other key economic data, please consider the following graphic.

In the meantime, corporates are hoping for clearer economic skies ahead and a lower COVID-19 case count, while actively monitoring global unrest with a spotlight on Afghanistan.

About the author


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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