This is going to be a very interesting morning as the latest fiction from the BLS on inflation is issued at 8:30 a.m. ET today. The last report for CPI-U came in at a shocking 9.1% so this report may reinforce the threat of persistent high inflation or provide the bulls one last short squeeze to get a final rally higher.
In this writer’s opinion there are two outcomes.
The Higher Inflation Continues
If CPI-U continues above 9% look for another leg down for bond prices with the coincident leap in yields, especially on the short end of the curve. Overnight the 2’s vs. 10’s spread blew through the -0.50% inversion level and that is a warning perhaps that the inflation rate might come in hot again.
This might well be the outcome due to continued higher rent prices distorting the housing market despite drops in energy prices and foodstuffs.
A Temporary Reprieve in CPI-U
The second outcome would be a dramatic drop in the annualized rate to below 8.5% while the core rate remains stubbornly elevated. I do believe this will be reflected in the report today as the broad drop in energy prices and some foodstuffs will be assisted by the liquidation of excess inventory by retailers cutting prices in some categories. This temporary distortion of the CPI will last through August before skyrocketing above 10% in the autumn.
Stay tuned folks as the real CPI data from the Atlanta Fed will be a beauty also despite the Fedspeak claiming that their “plan is working” and other such nonsense.