Wall Street may be underestimating inflation
of consumer inflation report This week could reverse the consensus view that the Fed will start cutting rates in the first quarter of this year.
The Ministry of Labor is expected to release a report on this issue. consumer price index (CPI) in December. Wall Street expects inflation to accelerate slightly from the 0.1% monthly rate and 3.1% annualized rate reported in November. The consensus forecast is for a one-month CPI increase of 0.2% and a 12-month CPI increase of 3.2%.
It's a little cooler here Cleveland Fed Nowcast is 0.3% The CPI rose an annualized 3.3% month-on-month, which is within Wall Street expectations. Analysts at Bank of America, for example, are predicting a 0.3% monthly increase.
seasonally adjusted chaos
One thing that can cause an unexpected turnaround is Ministry of Labor Seasonal Adjustment It seems to be lagging behind real-world discount policies by retailers.as holiday shopping With a larger proportion occurring in September and October, companies have been competing for consumers' dollars with early bird discounts. This is likely a good reflection of the downward surprise in the inflation numbers from the beginning of the fall, particularly the October CPI, which rose only 0.5% month-on-month.
Evidence that early discounts may have depressed monthly numbers can be seen in the details of the September and October CPI reports. The index of goods excluding energy products fell by 0.4% in September and by 0.1% in October. Sales of household furniture and consumables decreased in both months. Home appliance prices fell 1.4% in September and 1.2% in October. Apparel prices fell 0.8% in September, but rose only 0.1% in October. Jewelry prices fell by 0.9% and then by 0.4%. Toy prices fell in both months. Computer prices rose in September, but fell by 0.8% in October.
When a store sells products during the period traditional holiday shopping season On this day, which begins on Black Friday, Labor Department economists adjust the consumer price index to ensure that temporary seasonal discounts do not manifest as changes in the economy's price level. Otherwise, the CPI would show a significant deflationary rise in December, followed by continued inflation for several months. Seasonal adjustments are intended to smooth out the rise and fall of periodic discounts.
If the sale happens early, like it has in past years.Discounts can look like disinflation. If the new seasonality persists long enough, it will eventually be incorporated into formal seasonal adjustment. But this will take several years. It may take at least 5 years for a seller's pricing behavior to change consistently, but it will probably take him 8-10 years.
Few Wall Street analysts have shown any evidence that they are aware of this lag in seasonal adjustment. For analysts, October's numbers were evidence of strong disinflation, or even deflation, in prices.
The reward for early discounts is a smaller discount in December. If smaller discounts are implemented due to seasonal adjustments where larger discounts are expected, the result could be that prices rise unexpectedly or show stability.
The possible result is that Inflation is progressing faster than expected It is held monthly in December.
But Wall Street may ignore upside surprises
How will Wall Street react to an upside surprise in inflation? We first said that his CPI report on Thursday could: Upsetting the apple cart of interest rate cuts. But that's not a sure thing.
In recent months, There is a much stronger reaction to downward surprises than to upward surprises.. Investors are very attached to the belief that inflation will continue to fall toward the Fed's goal without further policy tightening. In fact, they are confident that low interest rates will not prevent disinflation. Therefore, the reaction to an unexpected rally is likely to be very modest, at least in the short term.
And they may be right about that Fed policy. Even though December's higher-than-expected inflation rate is unlikely to change Fed officials' belief that monetary policy is restrictive and can be “normalized” because inflation is falling. Rising inflation pressures, solid payrolls, and above-trend growth will likely take months to convince the Fed that December's dovish turnaround is premature.
