Morning Report: Bad news on inflation

Vital Statistics:

 LastChange
S&P futures3,965-62.25
Oil (WTI)121.41-0.14
10 year government bond yield 3.10%
30 year fixed rate mortgage 5.53%

Stocks are lower this morning after the CPI report. Bonds and MBS are down.

Inflation at the consumer level rose 1% month-over-month and 8.6% on an annual basis. This is a 40 year high for the index. Ex-food and energy, the index rose 0.6% on a MOM basis and 6% year-over-year. These numbers were higher than Street expectations.

The worrisome part of the CPI reading is that the month-over-month numbers are not falling. The April reading looks like an outlier, as we had a dip in energy prices that month, but it is hard to argue that price appreciation is peaking.

The food at home index (i.e. supermarket prices) rose 11.9% YOY, which was the largest increase since 1979. Food away from home (restaurant prices) rose 7.4%, however making apples-to-apples comparisons for restaurants is tough since portion sizes are hard to measure.

Ex-food and energy, shelter (i.e. home prices) rose 5.5%, which was the biggest increase since 1991. Rising home prices tend to affect the index with a 12-18 month lag, so these numbers would reflect late 2020 / early 2021 home price appreciation numbers. Since we have been seeing home prices rise in the high teens over the past few quarters, the index will begin to reflect this in the numbers as we move through this year and next.

Overall, this report didn’t show what the market was hoping to see – any indication that inflation is beginning to moderate. The Fed is probably going to hike 50 basis points at the meeting next week, and in July.

Consumers are in a downright awful mood, according to the University of Michigan Consumer Sentiment Index. The index declined 14% compared to May and is down 41% on a year-over-year basis. To put things into perspective, consumer sentiment is at the lows experienced during the 1980-1982 recessions, which at the time was the worst since the Great Depression.

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