CPI pressure

With the government shutdown, the US has not had an official source of goods pricing for the economy. Private sector measures and other indicators have been used in their absence and all of them seem to indicate that inflation is starting to show up on the numbers again. As you can see in the chart below, more than half of the goods in the CPI basket have experienced a price increase of at least 3%, while the Fed’s official target continues to be 2%. This is due to tariffs and government spending. Furthermore, the 4 month average of CPI, shows a 4% increase in prices, which if sustained, will be deeply concerning. It is no surprise then, that Fed governors and voting members of the FOMC are actively speaking against further rate cuts, despite potential (and real) unemployment problems. The probability of a rate cut on December 10th, less than a month away, is now 45%, after being above 90% for some time. If we get a cut, it’s likely going to push stocks up, and it should be negative for long bonds, as inflation pressures are showing up. But if we don’t get a cut, companies may layoff more workers, which will be concerning from the unemployment standpoint point. Not a good place to be for the Fed.

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