"We're Feeling Inflation Everywhere:" Why CPI Ignited Selloff, Ups Rate Hike Chances

SPEAKER_1 (0:00)

As we talk about the CPI print, I want to bring in our watchlist panel. We're discussing this print from September, the long-awaited CPI print. We know the Fed's watching, everybody's watching. And when it comes in even just a bit hotter than expected, it really turned the market. Scott Nations, President Nations Indexes, and Brian Jacobsen, Chief Economic Strategist at Annex Wealth Management, really changed the picture here today.

Whether it's a tenth of a percent higher, I guess that really makes a big difference. Let's start this conversation and get it going. Brian?

Brian Jacobsen (0:36)

Yeah, it really does. That 0.1 percent difference you wouldn't think would be that big of a deal. But it really is, especially since I think when we look at the nearer term changes, the month over month, as opposed to the year over year numbers, it does show that inflation is continuing to be on an uptrend. That 0.6 percent month over month for the headline, very large, but even core. And what we were really hoping for was to see that core cooling as opposed to heating up. So without evidence of core inflation cooling, at least on a three month run rate basis, it really, I think, paints the Fed into a little bit of a corner in terms of what they've been talking about. They want to focus on inflation. They say that they're singularly focused on that. And if that is indeed the case, it makes the argument that they really should keep doing the job that they started once again back in September.

SPEAKER_1 (1:30)

And even in the Fed beige book this afternoon, firms remained relatively positive on the economy, but so little to no change when it came to jobs, right? So that gives the Fed the green light to move ahead, right? Unless you had a terrible jobs picture. So that gives them the green light if they would like to move ahead. And also just the fact that there are inflationary pressures and wage pressures. And so people are noticing and that's something that we have to keep in mind.

What's AU here, Scott, to the big picture on the CPI print?

Scott Nations (1:59)

You're right. That was only one-tenth above the consensus estimate. But now we're talking 3.7% year over year, almost double the Fed's 2% mandate. Couple that with the fact that unemployment is well below the 5% level generally considered full employment. I think the Federal Reserve has no choice here. They have to raise rates. If there's a problem, it's that too many people, I think, are looking at the stock market and equating it with the economy.

Yes, some AI names have done really well, but the breadth in the S&P has been horrible. The average drawdown from the 52-week high for all of the names in the S&P is 19.7%. So the average stock in the S&P is nearly in a bear market.

So gasoline, if you want to talk specifically about energy in the inflation picture, gasoline up 9% last month, fuel oil up 74% year over year. So yeah, it was only one-tenth, but we can put our finger on precisely where it came from. We know, Nicole, that energy prices are not isolated. They work through every portion of the economy. People are feeling the pain at the pump. It's not just long distance over the road. Truck drivers, everybody who has to fill up with gas is feeling the pain. And inflation is working its way through the entire economy. You pointed out just a few minutes ago which three names in the stock market are higher today, or not names, but sectors.

Energy, you would expect, because crude oil is up another 1% today, back above $95 a barrel. The other two names, consumer staples and healthcare, are incredibly defensive sectors. So we should worry about the stock market with the S&P down 100 handles, just over 1% and the NASDAQ 100 down 2% because yep, we're feeling inflation everywhere.

SPEAKER_1 (3:56)

Understood. Within that report, I mean, you had even just a mixed bag, for example, food at home went down, food away from home went up and traveled, for example, there was still airlines were up 1%, et cetera.

Give us a look ahead here, Brian, as we take a look, what do you think could change? Because in theory, could the energy pop that we're seeing in the pressures be transitory? Is the Fed jumping the gun by hiking rates?

Brian Jacobsen (4:30)

Well, that is the argument for them not to hike rates, is the idea that this is a supply side shock. But if they do feel as though they need to bring demand back in line with supply, they only have a certain number of tools at their disposal. They're not going to be able to increase refining capacity or anything like that.