Bears - Most Since 2013

Month over month headline CPI was flat which met expectations and was down from 0.3% growth in October. Year over year headline inflation was 2.2% which met estimates and was down from 2.5% in October.

Energy and gasoline prices fell 2.2% and 4.2% monthly. Energy prices might rebound early next year because global inventory has shifted from a huge glut to a slight shortage.

The strength of inflation depends on how you look at it. Headline inflation fell, but that’s on a strong dollar and collapse in oil prices.

As you can see in the chart below, year over year median CPI was near the cycle high in the summer. It is also closing in on the peaks in the last 2 cycles.

Bears - Core inflation was strong, but a weak comparison helped it. 

Specifically, core inflation was 0.2% month over month which met estimates and October’s growth rate. Year over year CPI without energy and food was 2.2% which met estimates and was above October’s growth of 2.1%.

Because of the weaker comparison, the 2 year core CPI stack was only up 3 basis points from last month. The comparisons will get tougher every month for the next 8 months. I wouldn’t be surprised to see core CPI fall below 2% in the next 6 months.

Apparel, transportation, and education/communications prices were down 0.9%, 0.8%, and 0.5% monthly. Housing and medical care were up 0.3% and 0.4%.

As you can see from the pie chart, housing and medical care combine to be slightly over half of headline CPI. They are an even larger portion of core CPI. I have been expecting shelter inflation to moderate because of the weak housing market. But housing was still strong enough to drive core CPI higher.

If the housing market continues to weaken, we should see core CPI fall in the next few months.

Bears - The Fed’s Problem

Core CPI of 2.2% doesn’t seem like much because it will likely fall if the housing market is weak. However, it supports the Fed’s rate hikes this year, and hawkish guidance as of September.

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Moon Kil Woong 1 year ago Contributor's comment

I think the selloff has more to do with the concerns over trade wars and the global economy more than the Fed's actions. This is just that, a selloff at this point, not a bear market as many are hinting at.