Headline vs Core
Macro Perspectives
Going into today's inflation report, we'll see the first impact of rising energy prices in a while.
September will be the first rise in year-over-year gas prices in seven months.
To be sure, the halving of crude oil prices that took place from June of last year to June of this year was a huge contributor to the collapse in headline inflation from 9% to 3%.
Now energy prices are going the other way (up).
Of course, after 525 basis points of Fed tightening, higher energy prices are just another headwind for the consumer. That works in the Fed's favor, in wringing out whatever exuberance might be left on the consumption side.
With that, as we discussed last month, we should expect the Fed to focus on the core CPI number (excluding the effects of food and energy), which should continue to go their way in today's report (expected to be 4.1% yoy). And remember, we previously looked at this chart (below) last month, after the August CPI report.
If both core and headline inflation were to grow at around the average of the past three months (monthly rate of change), the paths would cross by the end of the year, and the core (what the Fed cares most about) would be in the mid-2s by mid-2024.
All of this said, with the tightening that has taken place in the treasury market over the past two weeks (via higher government bond yields), and with the risk of global war now very clear, the Fed (and markets) should be a lot less concerned about this CPI report.
