Consumer prices rose 7.7% yoy in October – TheStreet | CarTailz

Gargi Chaudhuri, Head of Investment Strategy, iShares, Americas

  • Consumer Price Index (CPI) inflation in October slowed down slightly to 7.7% yoy versus consensus expectations of 7.9%. Despite moderation in used cars (-2.4%) and clothing (-0.7%), headline inflation remains elevated, partly due to continued strength in housing, food and energy prices. Headline inflation remained strong month-on-month and prices rose 0.4% in October.
  • Core CPI, which takes out the more volatile food and energy components of CPI, grew 6.3% year-on-year below four-decade highs of 6.6% previously. In the monthly comparison, the core CPI was at +0.27% versus a pace of 0.6% in the previous month, which is a significant drop. Alongside accommodation costs, which rose 0.8%, core CPI was supported by upward pressure on leisure goods and services.
  • We continue to see accommodation inflation as the main driver of headline and core CPI for the next quarter. Because the CPI calculation for housing inflation reflects existing rental costs (not just new rental costs), it tends to lag behind other items in the consumer basket, as rental terms are typically one or two years. If inflation is to fall over the next few months, it must come from other components of inflation, particularly core inflation, which is being helped by loosening in the supply chain. However, housing inflation, which accounts for almost 40% of core inflation, will remain elevated.
  • This morning’s data showed further weakness in commodity prices (-0.38%) across categories including apparel, transportation and education. The pandemic drove purchases of many OTC items forward and now reduced demand in the wake of the pandemic has contributed to rising inventories and disinflation. As the holiday season approaches, retailers could take advantage of seasonal demand to reduce inventories. Several major retailers have already announced early Christmas shopping.
  • Last week at the FOMC meeting, the Federal Reserve stressed that it was very premature to talk about a “pause” signaling that they will raise rates further at their next meeting in December. The only question is by how much – this report suggests they can slow their pace of rate hikes to 50 basis points at their December meeting as there are signs certain components of inflation are slowing.
  • With inflation remaining elevated despite higher interest rates and quantitative tightening, market volatility has increased in major equity indices. Our strongest exposure to equities remains minimum volatility (USMV) exposure and quality exposures with strong cash flows that are more likely to weather market downturns. Within quality sectors, we favor exposure to broad healthcare (IYH) and healthcare providers (IHF). Exposure to companies with high dividend payments can also be a source of returns (HDV) in the current market environment.
  • How can investors hedge against higher and longer-lasting inflation? We believe that shorter-dated inflation-linked bonds can offer potential inflation protection as short-duration inflation-linked bond yields remain attractive. For exposure to short duration TIPS, consider the iShares 0-5 Year TIPS Bond ETF (STIP).
  • Investors should also consider investing in short-dated bonds as a substitute for cash or as an income driver in their portfolios. Specifically, investors could add SHV and SHY to their portfolios to access high-quality, short-dated government bonds and allocate to IGSB to access high-quality credit, which yields a coupon of almost 6%.

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