Thread by @RickRieder

The headline #inflation data today moderated a bit on the back of falling #gasoline prices, but it’s still running at a worryingly high rate.

Over time, we think the slowdown in #economic growth, the continuation of the @federalreserve’s assertive #HikingCycle and the possibility of resolution with several persistent supply chain issues should influence broad #inflation lower.

Still, while #CorePCE inflation (the #Fed’s favored measure) is likely to moderate in the coming months, it’ll still remain well-above the Fed’s 2% #inflation target.

Today, #coreCPI (excluding those volatile #food and energy components) came in at 0.3% month-over-month and rose 5.9% year-over-year.

Meanwhile, headline #CPI data printed flat month-over-month and came in at 8.5% year-over-year, with declines in #gasoline pricing contributing to this result, but both #shelter and food costs still rose significantly.

The persistence of still solid #inflation data witnessed today, when combined with last week’s strong labor #market data, and perhaps especially the still solid #wage gains, places Fed policymakers firmly on the path toward continuation of aggressive tightening.

Indeed, we believe it’s quite likely that the #FOMC will raise #policy rates another 75 basis points at the September 21 meeting, the third such substantial hike in a row.

Yet, there’s still a lot more data to come between now and the meeting (another #payroll report, another #CPI, consumption and housing data, as well as the late-August #MonetaryPolicy conference at Jackson Hole, Wyoming, all of which we’ll be watching closely).

If the Committee does indeed raise policy rates with another such substantial hike, it would bring the #FedFunds target range to between 3% and 3.25%, which is likely just beyond the “neutral rate” and begins the journey into more restrictive territory.

And while the #Fed will undoubtedly be closely watching both the labor markets and the #financial markets for signs of stress, the current central bank mantra of it being “absolutely essential that we restore price stability” is likely to win the day.

That’s the case despite the #inflation data providing a modest sense of relief today, as absolute rates of inflation remain high…

…and in fact, #price gains have been on an #accelerating trajectory over the course of the year, which presents a huge problem for the #Fed.

Inflation today can no longer be blamed on idiosyncratic, or one-off, issues, and for instance #shelter by itself, the greatest component, and one of the stickiest, will likely keep #inflation readings elevated for some time to come.

Still, the significant #wage gains witnessed in lower-income households in recent years, which has been helping these households contend with the burdens of high #inflation, may be placed at risk if the Fed tightens too aggressively.

We would think that this will be top-of-mind for #policymakers as policy moves deeper into restrictive territory.