Stocks Should Weather This Week's Inflation Reports

The stock market's rally should not be derailed by this week's inflation reports (October PPI and CPI), even if some are higher than expected.  High inflation prints, at this point, will not deflect the Fed from its gradual approach to tapering and thus should not damage stocks significantly.   What would be a more important negative for stocks is if oil prices break out of their recent range to the upside.   The passage of the infrastructure bill should not be a problem for stocks.  The bill's impact on economic activity will not likely be seen soon, possibly at least a year from now.  So, it can be put on the back burner from a market perspective.  But, a year from now, the bill's economic boost could be a factor pushing the Fed to raise rates.

The consensus estimates of +0.6% m/m Total PPI and +0.5% Core PPI risk being too high.  The Trade Services component could be lifted again by higher gasoline prices.  But, it has slowed in the past two months.  And, it could be offset by lower airfares, as was the case in September.  Moreover, intermediate prices, which lead finished prices, have slowed in each of the past 4 months.

Consensus expects +0.6% m/m Total CPI and +0.3% Core CPI.  While the consensus estimates have a good chance of being right, there is upside risk to the Core CPI.  Owners' Equivalent Rent should remain high, as it catches up to the large increases in rents reported in the press.  Used Car prices at the wholesale level surged over the past two months and could begin to show up in the Core CPI.  But, Used Car Prices should be ignored.  They will probably fall sharply once motor vehicle production becomes unhindered by the chip shortage.  This may be happening sooner than many expect.  Ford already said that the chip shortage is becoming less of a problem in Q421.  And, the jump in motor vehicle jobs in October seems to support this possibility.

Last week's reports muddied the picture regarding Labor Costs -- the primary determinant of price inflation.  While the Q321 Employment Cost Index had broken to the upside, the two latest reports -- Compensation/Hour and Average Hourly Earnings -- did not confirm the breakout.  Compensation/Hour slowed to 2.9% (q/q, saar) in Q321 from 3.5% in Q221.  The average pace so far this year is 2.6%, which is below the pre-pandemic trend (3.7% over 2019).  Unlike the ECI, compositional shifts toward lower-paid workers could be behind the slowdown.  But, Compensation/Hour is the most comprehensive measure of labor costs, so should not be entirely dismissed.

The 0.4% m/m increase in October Average Hourly Earnings was back to the rate seen from June through August.  It suggests that while wage inflation is higher than its pre-pandemic pace, it is not snowballing.  The components were mixed relative to their recent trends and split almost equally between a speedup and slowdown from September.