July inflation metrics may not be as worrisome as they seem
by Scott Martindale
CEO, Sabrient Systems LLC
Allow me to offer my insights into this week's CPI and PPI reports for July. CPI came in modest as expected, at 2.73% YoY, 0.20% MoM, and past 3 months annualized trend of 2.28%, which set the market on fire as a green light for the Fed to cut rates. But then today, PPI came in ultra-hot at 3.31% YoY, 0.9% MoM, and past 3 months annualized trend of a scorching 5.45%, which the market didn't like very much, especially the rate-sensitive small caps.
However, perhaps all is not so scary as it may seem. In the charts below, you can see that PPI tends to have greater volatility and a wider range. But over the past 15 years, both CPI and PPI have averaged right around 2.6% YoY. In the top chart of YoY numbers, I have drawn 2-year trendlines (PPI trending up and CPI trending down). They appear to cross at about 2.6% and may be destined to converge there.
In the lower chart, I show rolling 3-month annualized numbers to give a better read on the current trend. You can see that over the past 2 years, PPI seems to be in a wide range between 6.0% and -1.5%, which implies a midpoint of 2.25%. This is also where the 3-month CPI fluctuations appear to be settling.
So, both charts suggest to me that inflation seems to be destined to settle somewhere in the 2.25–2.50% range. A corroborating metric is the real-time blockchain-based Truflation metric, updated daily, which has fluctuated between 1.60–2.27% YoY over the past 3 months and currently sits at 1.99%.
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