8.5% PPI Confirms Two Triple Rate Hikes Coming

The good news is that all of the major indices that measure inflation peaked in March of this year. The bad news is that inflation remains near 40-year highs and has been falling too slowly over the past 2 months. Investors have finally heard the Fed more clearly that they are willing to allow a painful recession in order to slay the inflation demon. Inflation and the jobs report each month are the main tea leaves being anxiously watched for signs the Fed will slow its pace of credit tightening. The Producer Price Index (PPI) is one of those important clues of Central Bank resolve to stay tough on monetary policy. Today’s report of 8.5% headline and 5.6% excluding food and energy was higher than consensus with little progress since the big PPI drop in July. It’s better than the 11.7% print in March, but rates are too high and falling too slowly to change the Fed’s plan to hike the Fed Funds rate by 0.75% at the November 1st meeting and quite likely another 75 in December will be priced in if CPI mirrors PPI on October 13th. The robust hospitality and travel sector is seeing stubbornly high inflation and many expect this Service PPI to push tomorrow’s Consumer Prine Index inflation higher as well. Combined with a strong multi-family rental market and extreme housing prices, many worry that CPI will behave like PPI with a lack of significant improvement. If headline CPI rose only 8% YoY and core rose 6.5%, then the markets could have a nice bounce. If higher, then the markets will punish investors. While deeply oversold indicators have the stock market primed for a rebound into November, anything above these CPI rates would risk triggering new lows in stock indices first.  SP 3505 and 3325 are the current maximum short term risks on a bad news day for CPI.

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