Markets Need a Less Rosy View of Inflation News

Goodbye CPI Tuesday

“CPI Tuesday” doesn’t have the same ring as some other regular market dates, but there’s little denying that no single data release matters more these days than US consumer price inflation. Tuesday morning’s release on price rises in August will matter a lot.

Judging by the rally in equities over the last few days, plenty now believe that the August data will show a continuing decline, and ram home that the peak is in. For a cynical but fair take on the optimism, this is what Peter Tchir of Academy Securities Inc. said ahead of the numbers:

Everyone is waiting for Tuesday’s CPI data. We will get officially told what inflation was in August. It is unlikely that it will reflect what we see and feel every day. It doesn’t tell us anything about where September will be (actually, that is not true, as some of the data will be so off, that it will have to get fixed in next month’s report, and some is just stale by its nature (housing)….

The market has concluded that both the ECB and even the Fed, despite their protestations otherwise, are both being viewed as data-dependent. I cannot see any scenario where the market doesn’t decide that CPI is heading the right direction and that October will be lower than September and so on and so forth (so many commodity futures contracts that I checked out are all lower forward than spot). That combination should allow markets to continue to enjoy the strength that they saw towards the end of last week.

There is good reason for the growing optimism on inflation — but as Tchir suggests, that optimism is nowhere near as strongly rooted in facts as many have now convinced themselves. Yes, it does look ever more as though the peak for inflation is in, and that is far preferable to a situation where inflation rates were still accelerating. But the key is how quickly price rises come down. The Fed still wants to get inflation down to its target of 2%, and that is still a long way off.