Thread by @MacroAlf

Ladies and gentlemen, if you look under the hood this was NOT a friendly inflationary report for the Fed and markets.

I'd argue it actually increases the probability the Fed will have to go with a non-linear, more aggressive hawkish rhetoric to slow down inflation.

1/7

Sure, inflation ''slowed down'' to 8.3% YoY but base effects are huge and Powell himself told us they are focusing on MoM changes and looking at the composition of inflationary pressures.

So, we should look at those too...

2/7

Core inflation printed 0.6% MoM and beat ALL the 67 estimates in the Bloomberg economists' survey.

What's more important is that the contributions to the CPI baskets are changing: less inflation from used cars (volatile, red), much more from shelter (sticky, white).

3/7

Goods inflation is receding and broad-based services inflation is picking up. The Fed delay's in withdrawing accommodative policies has allowed inflation to feed into the stickier items of the CPI basket.

Have a look at the shelter contribution to CPI in more details.

4/7

The pace of change in the inflation drop matters too.

The Fed told us by the end of 2022 they will hike to around 2% and this will slow inflation down to 4%.

It's not enough for CPI to slow

The question is whether it's slowing enough, and which components are responsible?

5/7

This report pushes the Fed one step closer to ''we REALLY have to show we got a grip on inflation'' - basically put themselves convincingly ahead of the curve so to lower inflation expectations and avoid the risk of sticky inflation becoming stickier.

6/7

In tomorrow's piece on TheMacroCompass.substack.com we are going to talk about market pricing in inflation and bonds, why an even more hawkish Fed stance might be one step closer and what that would mean for your portfolio

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7/7