We’re in the final countdown to CPI. I wrote up a full preview yesterday and it’s going to be a big market mover.
There are two inflation numbers: headline and core and they’re measured in month-over-month and year-over-year terms.
- Inflation y/y +8.1%
- m/m +0.2%
- Core CPI 6.5% y/y
- Core m/m +0.5%
A final question is which one matters more? Non-farm payrolls offered a similar kind of skew as the headline was in-line with estimates but the unemployment rate was surprisingly low. Ultimately, that dominated.
Over at BMO, they lean towards the core: “Assuming the headline print isn’t paradigm-shifting versus consensus, we’ll err on the side of a traditional focus on the core measure for a directional bias for US rates,” the fixed income team writes.
I can see the argument that core matters more to the Fed so it should matter more to markets. At the same time, headline inflation seeps into the core so it’s more of a leading indicator so I lean that way.
I don’t think there’s a right answer because ultimately the way that traders are biased is more important. We can already see some depand to buy dips in equities and a curious move higher in UK bonds and GBP.
Another thing is that this is so finely balanced that little skews matter. The ‘consensus’ on m/m core is +0.5% but digging through economist estimates, the mean is 0.4%. I’d say the real consensus is more like 0.46%, which is obviously a bias more towards 0.4% than 0.6%. Note though that economists (and the Fed) have routinely underestimated core this year.
For the headline, the estimates are more-tightly bunched around 0.2% but there’s a slight upwards bias.