Unless you saw it, you might not have believed it.

But the market reacted positively to the inflation data print on Wednesday.

Both the Nasdaq and S&P 500 closed higher on the day. That enthusiasm even spread into the crypto space with bitcoin bursting back above $24,000.

At 8.5%, the CPI was just a fraction below the consensus forecasts of 8.7%. And enough of a drop from last month’s 9.1% to have the bulls frothing at the mouth.

However, if we were to go off the market’s reaction, an inflation number starting with an “8” is now supposed to be treated as good news.

Really?

What Today’s Numbers Really Mean

Perhaps the market has become so used to inflation’s long march higher, that it’s forgotten what inflation at over 8% actually means… and how long it really takes to get a number like that back under control.

Well, I know what a CPI print like that means… the systematic erosion of the value of every dollar in your pocket.

If it weren’t for a strong job market keeping upward pressure on wages, this inflation number would be tearing the economy apart.

However, here’s the thing…

Wages aren’t going up anywhere near the rate of inflation. Meaning, folks are slowly but surely slipping behind.

Although many are still dipping into savings they accrued through COVID, eventually that’ll dry up as well. And that’s when it’ll really start to put a handbrake on the economy.

Also, some of those new jobs on offer could soon start becoming much thinner on the ground.

For example, last month we saw how mega-cap stocks from Apple and Google through Tesla and Meta, are reducing or freezing new hires.

Meaning that with less demand, upwards pressure on wages will also start to decline… and will further increase the gap between wage growth and inflation.

However, the big outtake from me is how this all flows through into the markets…

A Hopeless Game of Catch-up

Just about every major commodity retraced strongly coming into the Consumer Price Index (CPI) reporting period. So, the market already knew the inflation number would be down from June’s.

However, when I look around at many of the major commodities (like oil, corn, and other agricultural commodities) they’re now trading back well above their July lows.

A break higher in any of these will soon push the rate of inflation up again. Even if they don’t rally but stagnate around their current levels, inflation is going to remain high.

And that flows into what really drove the market higher on Wednesday – speculation about interest rates.

Up until the CPI print this week, the market had just about locked in another 0.75% rise when the Fed meets on September 20-21. This would match the 0.75% rise in both June and July.

But with a softer inflation number this week, the bulls now believe the chances of a 0.75% rise are now less certain than the market has priced in.

Some even believe the Fed will actually start cutting rates early next year.

But they couldn’t be more wrong.

What we saw this week was one small blip in an inflation trend that began back in February 2021.

After deluding themselves into believing inflation was transitory for most of last year, the Fed left it way too late to try and get in front of the curve.

Now, even despite the recent CPI data, the Fed is hopelessly stuck in a game of catch-up.

Also, don’t forget that the Fed’s preferred measure, core inflation (which excludes volatile food and energy), came in at 5.9%. Meaning that it hasn’t budged at all.

Investors who’ve had a tough year so far, no doubt will be enjoying the bounce. But don’t kid yourself… there are still plenty of rate rises to come.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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