What We’ll Learn From November’s Inflation Data

It’s clear that 2021 will be a year of elevated inflation. It also seems that the transitory inflation camp were at least partially right. Inflation over recent months is down from the highs of the summer.

However, the transitory inflation debate is not the whole picture. Yes, inflation may have cooled somewhat, but where inflation settles over 2022 matters. November’s data will offer a little clarity.

Starting tomorrow, the Fed will meet to discuss monetary policy, which will include some perspectives on inflation and the policy reaction to it. On November 10, the Consumer Price Index (CPI) data for October will be released. We’ll also see more volatile Producer Price Index (PPI) data the day before, on November 9.

The Inflation Picture

In retrospect, early summer 2021 may have marked the peak of the surge in U.S. inflation. Since then, inflation has been a little more subdued and certain commodity prices have fallen back and supply chain issues, though not fully resolved, may have started to ease.

However, we should remember that September’s inflation increase, though offering some relief, was still double the same month in 2020. October’s data, which will be reported this month, may help confirm that picture should inflation remain fairly subdued. It will also help determine where 2021 inflation will finally land, with inflation somewhere north of 5% for 2021 looking highly likely. PPI inflation is rising even faster than that, especially for finished goods, so even if inflation may have tamed from its summer surge, we’re still seeing elevated inflation levels in parts of the U.S. economy.

Housing

Inflation indices are generally weighted by the items that people spend money on. It should be no surprise then, that housing whether mortgage costs or rental expense is a large portion of the CPI. For example, the Case-Shiller National House Price Index is up almost 20% on an annual basis.

That’s a puzzle. In contrast, the most recent CPI numbers had shelter costs rising only 3.2% over the past 12 months. If house pricing suggests more inflation to come, just as the PPI index might imply, then unfortunately, we might not be out of the woods yet on the recent inflation surge.

November’s data releases, together with the Fed’s commentary will offer a little more insight. Investors should watch closely. Though the stock and bond markets have been willing to look through much of the recent surge. Historically high inflation has often proved a clear negative for stock and bond investments. We may be on a path to improving inflation, but clear risks remain while many parts of the stock market continues to make new highs.