The inflation train keeps running way

Headline inflation came in at 8.2% in September, down slightly from 8.3% in August and off the four-decade high and peak of 9.1% in June. Core CPI (excluding energy and food prices) was 6.6% in September, up from 6.3% in September. However you read it, inflation is persistently high. Unemployment dropped slightly from 3.7% in August to 3.5% in September. Alongside inflation, unemployment is a second favorite indictor of mine to watch as it’s one of the Fed’s primary gauges for determining success in killing economic activity with higher interest rates. It’s still early but so far the unemployment is getting “worse” in the eyes of the Fed despite a few months now of massive rate hikes.

Mathematically speaking, for the Fed to reduce inflation back to its target 2% level, we’ll need to record many month-over-month drops in CPI. For example, if inflation dropped on average by 1% per month, we would reach the Fed’s target of 2% annualized inflation in 6 months or by roughly early summer 2023. A 0.5% average inflation drop would get us there in 12 months. Instead, what we’re seeing is drops of a fraction of a percent, giving the Fed reason to keep on track with its planned rate hikes and staying “higher for longer”.

At some point soon something in the credit markets breaks, a scenario we keep hurling towards each day as the US dollar value marches higher and global liquidity tightening continues.