Having seen producer prices soar yesterday, investors closely eyeing consumer prices for any signs that The Fed's 'transitory' inflation narrative is true and Wells Fargo analysts say it’s unlikely sticker-shock-weary consumers will see relief as the persistent supply-side crunch will “keep fanning the flames on inflation in the near term.”
Yesterday, the Labor Department released data for October’s producer price index (PPI), which tends to front-run consumer inflation data as at least some production costs get passed on to consumers. The headline and core data for producer prices came in at record highs.
And today, the Labor Department will issue figures for October’s consumer price index (CPI), a key measure of inflation from the perspective of end consumers of goods and services. Consensus forecasts predict a year-over-rise of 5.3 percent in the CPI inflation gauge for October, with the prior month’s rise amounting to 5.4 percent, near a 30-year high.
On a month-over-month basis, CPI is expected to clock in at 0.5 percent, according to consensus forecasts released by FXStreet, though Wells Fargo analysts expect inflation was running hotter.
“Consumer Price Index report for the month of October is unlikely to offer much of a reprieve on the inflation front,” Wells Fargo analysts wrote in a note, in which they predict a 0.6 percent month-over-month increase in the CPI index.
“If realized, this would put headline CPI inflation at 5.9 percent year-over-year.”
“Goods inflation has been running at rates not seen in decades, while services inflation has mostly been in line with its historical average,” the analysts added.
“We expect goods inflation to hand the baton to services over the course of the next year, but all signs indicate that supply chain bottlenecks will keep fanning the flames on inflation in the near term.”
Bankrate Chief Financial Analyst Greg McBride told The Epoch Times in an emailed statement that lost month’s CPI print showed inflationary pressures were broadening out. Prior months saw shocking price surges in areas like lumber, bacon, and used cars, but now price pressures have been seeping into other categories.
“Inflation is broadening out, with the necessities of food and shelter together accounting for more than half of the increase in September. Consumers are feeling it in the pocketbook at the grocery store and tenants in many parts of the country could get sticker shock at their next lease renewal,” McBride said.
He predicts that supply chain bottlenecks “will be with us well into 2022, and with that, upward pressure on prices.”
A cargo ship moves toward the Bayonne Bridge as it heads into port in Bayonne, New Jersey, on Oct. 13, 2021. (Spencer Platt/Getty Images)
Analysts at ING said in a recent note that the extent to which elevated producer costs will ultimately get passed on to consumers depends partly on whether businesses will be willing to squeeze margins to maintain volumes.
But that becomes less likely the longer supply chain bottlenecks persist, the ING team argued, “which means that we expect goods inflation to further increase over the coming months and to remain elevated throughout the first half of the year as pipeline pressures remain fierce.”
Notably, producer prices are running significantly hotter than consumer prices until now, pressuring firms' margins (or forcing them to increase prices at some point to the end-users).
Besides actual, realized inflation running at multi-year highs, consumer expectations for what the rate of inflation will be in the future in the United States are at all-time highs.
The New York Fed’s most recent consumer inflation expectations survey showed that short-term (one year ahead) inflation expectations rose in October to 5.7 percent, the highest reading in the history of the series. The medium-term (three years ahead) inflation expectations remained unchanged from the prior month’s level of 4.2 percent, which was a record high.
Also, a key measure of the bond market’s expectations for upward price pressures over the next five years, known as the 5-year breakeven inflation rate, rose to an all-time high of 2.99 percent at the end of October, dropping slightly to 2.94 percent as of Nov. 8. This indicates investors expect inflation to average around 3 percent a year for the next five years.
Federal Reserve policymakers have maintained that the current bout of inflation is transitory, though Fed Vice Chairman Richard Clarida acknowledged on Nov. 8 that inflation this year has been “much more than a ‘moderate’ overshoot of our 2 percent longer-run inflation objective” while adding that inflation risks are weighted to the upside.