I was speechless this morning after reading the August jobs report. I’m still speechless now… in that, I wasn’t quite sure what to say on a Friday afternoon.
The weather in Florida continues to offer predictable thunderstorms at 3 pm… the markets bounced to support at 414 and couldn’t break out on three occasions today. And my dogs keep finding new holes in fences and going on Homeward Bound adventures that will likely require another big expenditure this year.
So… what’s the big story for Friday? What you need to know RIGHT NOW for next week’s CPI data.
Market Inflation and CPI Expectations
The Cleveland Federal Reserve projects that the CPI number for July will come in at 8.8% year over year. That would be slightly down from the 9.1% figure we saw in June.
More importantly, the Cleveland projection calls for month-over-month estimates to come in at 0.3%, a figure we witnessed a few months ago. Consensus calls for inflation to come in at 8.7% annualized. So, as you can see, inflation is running VERY hot right now.
The actual number for CPI has surpassed expectations four months in a row. And it’s interesting to see that despite all the chatter around “peak inflation,” the estimate for the month is largely in line with the June forecast.
While gasoline prices have declined for 50-straight days, our supplies continue to dwindle. We’ve been draining our Strategic Petroleum Reserve and bucking the front-month oil contract for months. The problem is that these releases of about 1 million barrels per day will soon end when China’s economy returns online.
If WTI crude pushes higher again, those utility gains will evaporate. Meanwhile, rental prices typically lag and will continue to hit CPI reports over the next two months. And then there’s the big number…
Wage Growth Accelerates…
Today’s jobs report noted that we had recovered all jobs lost since the start of the 2020 COVID crisis. Wage growth increased a stunning 5.3% year-over-year. That figure lags against the 9.1% in inflation, but it’s another inflationary number that the Fed must get under control.
American workers have options right now. And they are demanding higher pay to keep up with the inflationary pressures hitting their accounts. The problem is that businesses MUST find a way to pay these people. The most common is to pass on the uptick in wages in the form of higher product and service prices…
This means… more inflation. Even if supply chain and energy bottlenecks resolve over the next 12 months. Andrew Bailey, head of the Bank of England, is facing this challenge in his country. Inflation could hit 13% in that nation, given energy costs and problems related to wages.
“If everybody tries to beat inflation – and that is in both price-setting and wage-setting – it doesn’t come down, it gets worse,” he said Friday. “My key point is [that] if inflation becomes embedded and persistent, it worsens. And the effects get worse.” That sounds familiar…
And he’s not alone. The International Monetary Fund (IMF) is in the same camp. It warned there exists a “substantial risk” that inflation will become a permanent part of the global economy. It also said if inflation goes higher, we will see a possible “wage-price spiral.”
Back in June, even the Fed openly worried during its FOMC meeting that inflation would remain entrenched. So… it shouldn’t surprise anyone if this period is far more volatile than what you might hear on the news. Yes… inflation might pull back to 8%… maybe even 7%.
But keep in mind that the Fed’s target is 2%. The longer they take before decisive action… the longer and more painful the stagflation process will be. We’ll talk about the different plays that can fight back against entrenched inflation next week, with a special focus on REITs, small banks, and commodities. We’ll beat this thing together.