US Rates - US CPI & TIPS: On firmer footing

Harry Downie (0:08)

Hi, and welcome to the At Any Rate podcast, JPMorgan's Global Research podcast, where we take a look at some of the biggest drivers behind themes and trends in fixed income, currencies and commodities markets. I'm Harry Downie from the US rate strategy team. I'm joined today by Abiel Reinhart from our US economics team to discuss inflation, especially pertinent given we've just had the September CPI inflation release here in the US.

We're recording this podcast on October 14th, and our comments today are based on our published research available on JPMorgan markets. Abiel, thank you for joining me.

Abiel Reinhart (0:44)

Thanks, Harry. Good to speak with you again.

Harry Downie (0:47)

Okay. We can just get straight into the details of the print. What was the high-level read and what was your view on it?

Abiel Reinhart (0:53)

I would definitely say this was a fairly firm print. We were expecting a 0.18 increase on the core. Consensus was around about 0.22.

It ultimately came in 0.33. And moreover, this followed a 0.29 last month for the August report. But a lot of the August report, about 10 basis points, about a third of that was just coming from a single component wireless telephone service. Whereas this month, you had a much more broad-based increase in inflation. It's hard to discount this. Let me put it that way. And it shifted, I think, some of the narrative around, might we be seeing slower inflation here?

Clearly, we and the Fed as well don't want to become too data point dependent. But just to put some numbers on this, after this morning's print, our estimate of core PC inflation is at 0.13. That would take the over a year ago rate, if realized on core PC inflation, back up from 3 to 3.1, back to a slightly firming trend on core PC. And then also, the three-month rate, which Governor Waller, probably some others have brought up this three-month rate, is something that was optimistic, leading into the last FOMC meeting. And ultimately, after the revised PC numbers came out for August, got down to 2.0%.

Now our estimate is that would go back to 2.8, firmer also on just over the last three months. Pretty firm number on core PC, fairly broad-based, a fairly firm number there on core PC as well, and somewhat of a re-acceleration. That was my high-level takeaways. How about you, Harry? How did you react to this? And how do you think the market took this print?

Harry Downie (2:53)

Similarly to you, it was a firm print for the inflation market. The inflation market spends more time focused on the headline non-seasonally-adjusted index level, given that is what it is priced off of. But even for that headline level, that also surprised the upside. It was remarkable for inflation markets in general because the overwhelming majority of recent prints has and have surprised to the downside. So going into this print, 14 of the last 18 CPI reports had surprised to the downside of swap market pricing. And this was actually the largest upside surprise we've seen since March of 2024 So meaningful for the inflation market. It also has knock-on impacts for inflation markets. Carry inflation markets are priced with a three-month index lag to actual inflation. And so given we now have this report in hand for September, we know the November carry for tips will likely firm both cross tips itself, but also the breakevens. And now we're looking at carry for the five-year point around 10 basis points for both the tips and the breakevens outright, which should start to attract slightly more investors to the asset class.

But Abiel, let's focus in on not being as data point specific with this print. I thought when I was looking for the details, there were a few things which might have more persistence to them.

Firstly was on core goods. We've obviously been in an era of supply chain pressures that gauge from the Fed has been rising. We've seen the same in survey-based data as well as import prices and now we are starting to see some upside pressure from core goods prices. Free month annualized rate of 2.2 percent. That's on the back of the April to June period actually being the weakest period of core goods prices we had since 2024 Do you see that as persistent? Do you see there's more of longevity to the upside we've seen in core goods pricing?

Abiel Reinhart (5:09)

I do think there is going to be some longevity here to what we've seen there.

The three-month rate is at 2.2 percent, so that's almost back to the highs of last year when we had all this tariff-linked inflation. Will it be that high persistently going forward? Maybe not.