Inflation, Inflation, Inflation! What It Means for the Fed

(LPL Financial) - Inflation, Inflation, Inflation

In the latest LPL Market Signals podcast, Fixed Income Strategist Lawrence Gillum and Chief Economist Dr. Jeffrey Roach discuss what the higher than expected August CPI report means for the Fed, the markets, and if a soft landing is still in the cards.

CPI report surprised to the upside 

The August Consumer Price Index (CPI) rose 8.3% year-over-year (YoY) from 8.5% in July. Excluding food and energy, the core CPI rose 6.3% (YoY), accelerating from last month. Both headline and core inflation were higher than analyst expectations. Inflation pressures continue to ease in a few categories such as gasoline, airfare, and used vehicles. However, several categories are still running hot. Food prices rose 11.4% from a year ago, the largest year-over-year increase since 1979, and electricity prices increased 1.5% month-over-month, the fourth consecutive monthly increase. However, as import prices and producer prices ease, the inflation outlook should improve.

How Does the Fed’s Reaction Function Change with Today’s Report? Is a Soft Landing Still Possible?

Headline inflation is likely past its peak, but the Federal Reserve (Fed) still has work to do. The Fed will likely increase rates again by 75 basis points later this month as core inflation is not cooling as fast as expected. The Fed has two more meetings after next week’s meeting, and we’ll likely continue to see interest rate hikes at those meetings as well. The real risk to the economy is in 2023 when higher interest rates will likely flow into the real economy. At this point, we think there is a 50/50 chance of a recession in 2023.

What Does the Inflation Report Mean for Stock and Bond Markets?

Right after the CPI print was released, equity markets were sharply lower and bond yields sharply higher. With the Fed likely having to hike interest rates more than markets were originally expecting, that has put upward pressure on short-term yields. And with the prospects of higher rates, equity markets sold off broadly with all sectors down after the report.


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This Research material was prepared by LPL Financial, LLC. 


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