U.S. Consumer Prices Soar 7%, Biggest Spike Since 1982

The Consumer Price Index (CPI) rose 0.5% month-over-month (m/m) in December, above the Bloomberg consensus estimate of a 0.4% increase, and following November's unrevised 0.8% gain. The core rate, which strips out food and energy, increased 0.6% m/m, topping forecasts to match November's unadjusted 0.5% rise. Y/Y, prices were 7.0% higher for the headline rate—the fastest pace since June 1982—matching estimates and following the prior month's 6.8% increase. The core rate was up 5.5% y/y, above projections of a 5.4% increase, and following November's unrevised 4.9% rise.

An interesting dynamic played out in the market yesterday as Powell delivered his testimony to the Senate Banking Committee. Many of the expensive tech names recharged, with the Nasdaq closing the day up 1.4%, as investors heard comments that inflation would probably ease by the middle of this year. Others discounted the outlook, citing Powell's infamous "transitory" call from 2021, and said traders were rushing in to buy the dip despite the Fed taking away the punch bowl. 

"The pullback in risk assets in reaction to the Fed minutes is arguably overdone," J.P. Morgan's Marko Kolanovic wrote in a note to clients. "Policy tightening is likely to be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery."

Also sticking to the gradual stance was Ian Lyngen of BMO Capital Markets. "Powell noted that the balance sheet runoff will occur later in 2022 and that 'it's a long road back to normal.' On net, the Chair’s comments are consistent with a willingness to deliver the liftoff hike in March assuming there isn't a dramatic reversal in the pace of consumer price gains."

Those that are more gloomy on risk assets are calling the comeback a dead cat bounce, or that outsized leverage can produce strange reactions (little jumps can be magnified by the covering of short positions, etc.). Those subscribing to the most dire of bubble forecasts also point out that the burst happens in stages, like the dotcom bubble, which saw many session rallies as the Nasdaq dropped from 5,000 to below 1,000 between 2000-02. "The things that performed the best since March of 2020 are going to probably perform the worst in this tightening cycle," declared billionaire hedge fund manager Paul Tudor Jones.