Thread by @RickRieder

Today’s #inflation report continued to reinforce the theme that gaudy #price gains are not standing in the way of demand.

It is a very rare time in history, in fact, most people operating in #markets haven’t seen this sort of demand outstripping supply in the real #economy in their careers, with some areas seemingly depicting a dynamic suggesting that “price is no object.”

Clearly, #inflation has been escalating for a number of months due to #shortages of supply in areas such as #housing, #commodities, semiconductors, new and used cars, etc., and those supply shortages are mostly still in place today.

Remarkably, though, #demand is showing very little let-up despite these #prices staying sticky high, with the rapid transmission of the Omicron variant of the virus making a return to normalcy a more extended process.

With respect to the data, #coreCPI (excluding volatile food and #energy components) came in at 0.6% month-over-month and 5.5% year-over-year.

Meanwhile, headline #CPI data printed at 0.50% month-over-month and came in at 7.0% year-over-year, the greatest increase over a 12-month period since mid-1982.

Today’s report continues a trend of #inflation prints that reside at multi-decade highs over the near-term, and we do not expect to see any letup for a few months, but some improvement to #inflation rates may be expected as spring/summer approach.

Clearly, the @federalreserve is on notice regarding this demand versus supply imbalance, which has been driving prices persistently higher for many months now.

Indeed, recent #Fed minutes and Chair Powell’s testimony clearly chronicle a Fed that is going to cut quantitative easing, raise policy rates and embark on quantitative tightening, all in a compressed time frame to deal with this level of #inflation.

We don’t think the #Fed will overreact to this condition, as easing and tightening are not symmetric #economic and market reaction functions, particularly when draining #liquidity from the #financial system.

We think the #Fed will raise rates shortly (probably in March) after ending #QE, but we think that the draining of #liquidity should only be initially designed to target the excess reserves recently created.

In our view, it would be a mistake to go significantly deeper at this point, as pressure on growth, #employment and financial #markets can react in a more extreme way than required to bring down inflation, which is likely evolving toward a lower trajectory in the coming months.