Inflation plateaus as commodities continue upward climb
Summary
August CPI data showed inflation declining slightly from its June 2021 peak, while in energy markets recent supply shocks continue to drive prices higher. Interest rates remain range bound as next week’s FOMC meeting approaches.
Inflation
The latest CPI reading showed a 5.3% year-over-year increase in prices, which is slightly lower than the prior month’s 5.4%. The leveling trend in YoY readings helped to alleviate fears of runaway inflation and provide empirical support for the Federal Reserve’s view that recent price increases are transitory. The 10-year Treasury Yield briefly dipped below 1.27% in response to the news but has since rebounded to over 1.30%, continuing the recent trend of rates being range-bound.
Gas prices on the rise
Despite the recent plateau in CPI, commodity markets have kept upward pressure on inflation forecasts for the rest of this year, as reduced supply and increased demand continue to drive up prices. This has been especially true for natural gas, where reserves are at historic lows, and benchmark indices in France and Germany have climbed almost 100% since the beginning of the year. The story is similar in the U.S., with NYMEX 1st H Hub also experiencing a precipitous climb.
Limited supply has also been a factor for crude oil, with inventories in the U.S. declining by about 6.4M barrels for the week of Sept. 10. The decline was in part a lingering consequence of recent inclement weather, as a significant percentage of U.S. Gulf producers impacted by Hurricane Ida remain offline.
(Related insight: “Using commodity collars to manage market volatility”)
Labor market
Initial jobless claims came in at 332k last Thursday, slightly higher than the 315k consensus and prior reading of 312k. Despite the miss, markets reacted somewhat positively to the news, as expiring unemployment benefits and expected claims related to Hurricane Ida had already dampened expectations. The employment picture in the United States will continue to be a key factor in the Fed’s decision-making going forward, especially if inflation stays at or below its recent 5.4% peak.
Corporates concerned with the threat of rising interest rates should keep an eye on headlines coming out of the FOMC meeting next week for the latest messaging from Powell and the other committee members.
The week ahead
Markets will be waiting on the FOMC announcement next week to assess the Fed’s latest views on tapering and the timing of future interest rate hikes. There is also some housing data on the agenda, with housing starts, existing home sales, and new home sales scattered throughout the week.
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