Inflation? What, me Worry?

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Yesterday’s strong response to the CPI numbers has caused quite a stir. A headline on MarketWatch read in part, “U.S. inflation roars back.” I was thinking about the inflation numbers last night as I fell into a contrarian mood. Clearly, most people expected the report to show more progress on whipping inflation. But were the numbers really so bad?

Keep in mind that year over year numbers are strongly influenced by inflation numbers from the past. Let’s look at numbers that reflect just recent activity. The month over month CPI change for July was 0.0%. For August it was 0.01.An average of 0.005 for two months. Extrapolated over a 12 month period, that would place year over year inflation next August at less than 1%. This sounds like a win for the Fed’s approach. Core CPI, which doesn’t include energy and food, remained constant month over month at 0.3%. If maintained over the next 12 months, we’d see an annual increase in core prices of slightly less than 4%. Not so great, but not soooo bad. Certainly moving toward the Fed’s target. One might argue that the declines in energy prices will reduce future costs of goods and services dependent on them. In the last three months light sweet crude futures have moved lower from over $120 a barrel to less than $90.

I don’t know how Jerome Powell will spin next week’s report, but he does have room to make a positive interpretation of the data. As option traders, we’ll watch the market closely. Successful trading decisions will depend not so much on what Powell says, but on how the millions of traders with varying skills and methodologies for data interpretation establish the market value for thousands of stocks.