Flight to Safety

CPI and PPI: Two Sides of the Same Coin

On Wednesday, the September Consumer Price Index (CPI) report showed that headline inflation (including food and energy) increased 3.7% over the past 12 months, above the 3.6% increase that economists forecasted. The report showed that “core” inflation was also higher than expected, at 2.6%, over that same annual period. Core inflation removes food and energy prices from its calculation, and the removal of those costs typically reduces the volatility of the measure. While core CPI coming in higher than expected can suggest that inflationary pressures are becoming more broad-based, we believe most underlying components of September’s measure don’t yet suggest this. Shelter costs (rent and rent equivalents, namely) only grew by 0.4%; similar to last month and within the measure’s observed range year-to-date.

A companion measure to the CPI is the Producer Price Index (PPI), which tracks inflation from manufacturers’ and service providers’ perspectives by measuring changes in the selling prices they receive for their goods and services. September’s PPI report was also released this week and was especially notable as it showed a monthly gain of 1.3%, more than double the 0.6% that was forecast by economists and the largest monthly increase in over four years. Most of the increase in goods prices was driven by energy producers; while there is potential for those price hikes to spread, this month’s gain was largely in reaction to the energy price increases that have already occurred. Thus, we do not expect such rapid growth to continue.

The Flight to Safety

Many AI-related companies’ stocks sold off throughout the latter half of the week and traded with volatility on Thursday, driven in part by investors digesting the hotter-than-expected inflation data. Investors appeared increasingly concerned that persistent inflation could keep borrowing costs elevated, complicating the economics of the substantial capital expenditure investments being made by AI-related companies. For companies that are relying on large amounts of debt to finance that CapEx investment, higher financing costs could weigh on their future profitability and returns. Amid the heightened inflation concerns and equity market volatility, a “flight to safety” unfolded on Thursday as investors appeared to seek the relative safety of U.S. Treasuries and other “safe” assets. This increase in demand pushed Treasury prices higher and pushed yields lower across much of the maturity spectrum. 10-year Treasury yields, for example, dropped by around 10 basis points (0.1%) to around 5.09%, representing one of the largest single-day decreases for that specific yield in the last year.

At present, it is difficult to say if any of these data points – whether referring to CPI, PPI, or 10-year Treasury yields – represent more than a continuation of the short-term volatility that capital markets have become accustomed to this year. Consumer-side inflation data is largely moderate compared to 2022’s higher measures, and 10-year Treasury yields are still near their recent multidecade high of ~5.3% despite Thursday’s bond rally. For now, the week's developments serve as a reminder that inflation and investor risk appetite can pull interest rates in different directions. While persistent price pressures may keep borrowing costs elevated, periods of heightened market uncertainty can simultaneously increase demand for Treasuries and push yields lower. How these competing forces evolve will remain important for consumers, corporations and investors alike.

Takeaways for the Week:

• September’s CPI report showed headline consumer inflation increasing 3.7% over the last year, vs. a consensus forecast of 3.6%
• September’s PPI report showed a monthly producer price increase of 1.3%, more than double the 0.6% consensus forecast
• Treasury yields broadly fell on Thursday as investors sought the safety of lower-risk assets and U.S. debt

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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