Bond traders like to be as efficient as possible when quickly analyzing incoming economic data. Often, the reaction boils down to two four-letter words: “beat” or “miss.”
For something like the August jobs report released earlier this month, it’s intuitive enough: U.S. employers added 235,000 workers, much lower than the estimated 733,000. That’s a miss — everyone can agree that more hiring is better than less. A higher number is almost always preferred for consumer survey data, gauges of manufacturing activity and retail sales.
With inflation, however, it’s trickier. The U.S. core consumer price index rose just 0.1 percent in August from the prior month, the smallest increase since February, according to Labor Department data released Tuesday. Economists had forecast a 0.3 percent advance. Sure enough, some interest-rate strategists immediately pointed to it as a “miss” as long-term Treasury yields tumbled.
I’d call it a beat.
At this point in the recovery, the Federal Reserve and investors broadly aren’t concerned about the world’s largest economy veering into a deflationary spiral. Year-over-year core CPI is still at 4 percent, while the headline figure that includes energy and food prices is about 5.3 percent, among one of the highest readings of the past three decades.
What’s more, these elevated inflation numbers appear to be impacting Americans’ expectations. The New York Fed’s August survey of consumer expectations showed the median expected inflation rate over the next three years is 4 percent, the highest ever in data going back to 2013. Over the next year, consumers expect the following price increases: rent, 10 percent; medical costs, 9.7 percent; gasoline, 9.2 percent; food, 7.9 percent; college, 7 percent. The central bank’s measure of inflation uncertainty is also at an all-time high after declining gradually for most of the 2013-2020 period, which could hold back consumers and businesses alike.
That’s not just conjecture. Over the past year, as inflation readings set records, Citigroup’s U.S. Economic Surprise Index has been mired in a slump, falling recently to the lowest level since the worst of the COVID-19 pandemic. While that decline isn’t due entirely to inflation pressure, the increase in consumer prices has become mainstream enough that the Biden administration has had to push back, with White House National Economic Council Director Brian Deese earlier this month slamming “pandemic profiteering” from large meatpackers.
It’s too soon to say whether August’s CPI report is a step toward vindicating Fed Chair Jerome Powell, who has largely maintained that the sharp rise in inflation coming out of the pandemic slowdown will prove transitory. As FHN Financial’s Chris Low noted, core goods prices rose 0.3 percent in August while core services were flat, suggesting that the delta variant curbed consumer spending on the latter. Powell and his colleagues will discuss their views at next week’s Federal Open Market Committee meeting.
Powell said last month that in his mind, “the ‘substantial further progress’ test has been met for inflation,” meaning that he’s seen enough on that front to begin tapering the central bank’s bond purchases. This latest data might give the Fed enough cover to push back the official start of tapering to November, rather than move forward next week, but it won’t alter the seemingly consensus view that the gradual pullback will begin by the end of the year.
In the meantime, market watchers should reconsider their language around monthly inflation data. Falling short of estimates is a beat for consumers, the Biden administration, the Fed’s new policy framework and, at least initially, both the stock and bond markets. Investors can cheer for a pickup in inflation when the economy is slow. For now, the price gauges could use a cool-down.