Do You Hear What I Hear?

The fourth of December’s five gasoline price readings hit EIA’s website yesterday. The average stands at 2.47, 9.1% above 2018’s December reading.  Unless another large component of CPI takes a nosedive this month, CPI could top 2.3 or even 2.5%.  This is a level not seen since Oct 2018 (the shaded area below) when the 10Y averaged 3.15%.  It’s currently at 1.95%, so something is clearly out of sync.The Fed has been saying they’re going to allow inflation to run a little hot.  And, it has, with Core CPI running 2.3-2.4% since August. The 10Y has responded, rallying from 1.43% in September to its current 1.95%.

All year long, YoY declines in oil and gas prices have kept headline CPI below 2%.  It finally crept above 2% in November.  December will represent a very substantial departure, with a YoY increase adding to rather than throttling back Core CPI.  Is the bond market ready?  Are investors listening?

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