Consumer Inflation

The CPI data shows that price inflation is cooler than anticipated. This may re-affirm Fed’s narrative that inflation could be transitory. Nonetheless, Pika World believes that inflation is still suggesting some stickiness.

Core CPI rose around 0.1% in August compared to July, the smallest increase since February. It is a relief for investors as the pace of price inflation has often solidified the call for quicker tapering and a high-interest rate to tame price increases in the economy. We have seen how the S&P 500 shot up 13 points after the data, with the Nasdaq firmer.

Food prices such as Chicken rose 2.2% in August, and the cost of milk jumped 0.9% after moving up 0.55 in July. Likewise, hospital services were 0.5% higher. In our earlier writing, rent price, one of Pika World’s big focuses, continued to climb by another 0.3%. This is a piece indicator which Pika World is focusing strongly on as the pandemic highly impacts it.

There is an underlying worrisome trend. The median inflation expectation based on the 3-year horizon has increased to 4.0%. One year ahead, inflation expectation also rose to 5.2%—both of these increases spread across different ages and income groups. This reflects the strength of consensus in belief across different generations of the population.

Producer Inflation

Perhaps, it is helpful to use 3M as a case study of how producers face inflation pressure. We can see some hindsight from 3M CFO during a Morgan Stanley conference, which hinted that the cost impact on earnings has been between 1% to 1.5% due to the rise in raw materials and steeper labour and logistic cost.

This means that product price increase pace is outstripped by input inflation. This is not a new realization as corporate profits are set to hit hard, especially for the producer, as the recent PPI rose 0.7% in August compared to July.

While companies have generally been able to pass some costs to consumers, there is evidence that such a strategy is getting more challenging.

Pika World expects PPI to continue climbing as we seek a flatter growth given the expectation for supply chain constraint in material input and labour to soften.

What’s on the Menu Today?

Today is an important day for the market.

At 8.30 pm, we will receive the NY Empire State Manufacturing Index, which will remain steady at 18.00.

10.30 pm will bring us to Crude Oil Inventories which is expected to fall b 3.903M.

It is 15 September, Tuesday, at 7.10 am in Singapore and 7.10 pm in New York. The market has been bouncy, and we hope all friends a profitable week ahead!