Hot CPI, Surging Energy Costs & the Fed’s Next Move

Marlee (0:00)

I do want to welcome in our next guest, joining us this morning, Ed Siddell, the CEO and CIO of EGSI Financial. Ed, great to have you with us today. Now, we did get that hotter than expected CPI.

And I know before that, you said that you felt we had been seeing some progress in inflation. How concerning is this latest data for you?

Ed Siddell (0:21)

Well, thanks for having me back, Marlee. You know, we were trending in the right direction until the CPI report came back, and really what it's showing us is that, you know, month over month, it's a little bit hotter, higher than expectations.

But honestly, for us, we believe that it's more of an energy issue than a monetary supply issue. And so right now, the big concern is when you're looking at the bond market, you know, we saw the 10-year treasury really jump up. I mean, from the bottom of the session, before the CPI report came out, the 10-year treasury was 5.19 percent.

And now it's about 5.36, you know, almost at the high of where it was. So that's, you know, what that's telling us is there's some inflationary pressures and concerns going on as it relates to the market. And really, I think that this is going to give the feds pause and really take a look at, you know, rates going forward. You know, there was really only a 22 percent probability that they were going to raise rates in October. But that changed since the CPI report came out. It's over 50 percent. We just believe that the feds probably will not raise rates in October. They may in December. But again, you know, this has more to do with energy than the monetary supply.

Marlee (1:40)

And how are you looking at energy and its component here? I mean, I think everyone knew what was going to go higher because we knew energy prices went higher on the month. But Ed, are you viewing this as a temporary energy driven inflation spike, which I think was what the Fed had been signaling it was viewing energy as? Or are you now seeing this as perhaps feeding into broader inflation and that we could be keeping these price pressures elevated for longer?

Ed Siddell (2:09)

Well, we do think it is going to be short term, right? Longer than what was expected.

But again, you know, the inflationary pressures, just like the feds were anticipating, that it really has to do with energy. And if you look at diesel prices, you know, it hit the national average all-time high $6.52 a gallon.

Now, I think the national average is $6.32 a gallon. And so it's actually trending in the right direction. You know, if it was getting north of the high, then there's some concerns going forward. But I think the feds are really looking at this, is that they can't control inflationary pressures based on what's going on in the Middle East. Even though Warsh, I believe, is really hawkish as it relates to inflation, I think they're going to let this play out and let the markets kind of correct itself.

Marlee (2:59)

And so then how do you view the feds' next move? I mean, you highlighted the FedWatch tool had moved higher yesterday. We were closer to about 20% chance of a hike at this October meeting at the end of the month. It was considerably higher when I was looking at December. It was close to 90%.

Now we've gone north of 90% for December. But as you highlighted, the real conversation stems around this October one. Now it's close to 44% pricing in a hike. We do have the midterms to think about here too. There's been a lot of conversation that that would potentially hold off a hike. Is this data enough to make them move in October despite some of the potential implications on the political side?

Ed Siddell (3:39)

I don't think so. I don't think they're going to make a change. I think they're going to keep it as it is for right now just because of the midterms. They don't want to have a political influence as it relates to the midterms going forward. Honestly, the move that we saw, even though the CPI was a little bit hotter than expected, it's not enough to move the needle to make a jump. Now, having said that, the feds did raise rates.

I think their biggest concern is, and we talked about this last time, they don't want to play catch up. They don't want to get caught behind the eight ball. As we saw this under Powell, when they continued to say inflation was transitory, what they had to do was aggressively accelerate rate increases going forward. And I think that the rate increase was predicated based on that going forward, and it's going to give them enough breathing room to take pause, take a look at the bigger picture going forward before they have to make another decision.