Daily Brief - How will inflation fall

The latest US CPI was released in mid-January and the 7.0% print knocked the markets down 11%. The next release is around the corner on Feb 12th and it’s fair to say the market will watch it carefully.

With the pandemic behind us, inflation will likely be the driving force behind Fed policy for 2022. So we want you to look at the chart below.

The plot shows how large changes in growth impact inflation ~12 months later. In particular, the plot suggests inflation will moderate in 2022.

Of course, the linkage between growth and inflation is not a mechanical 1:1 relationship.

Data shows the two are linked by an “elastic band” of sorts, and that CPI can diverge from growth, but not forever.

A moderation of inflation will help stem the risk of aggressive policy action. But it won’t happen immediately, and the Fed is loath to respond quickly to any change in data.

So brace for a rocky H1’22.

It’s learning time! What is the ‘US ISM Manufacturing New Orders PMI’?

PMIs are surveys of companies that ask how business is doing. They are quality leading macro data and should be observed carefully. PMI stands for Purchasing Managers' Index.

The companies who produce PMIs, such as ISM in the US, send out questionnaires to large groups of companies, asking questions like “are inventories higher or lower than last month?”.

The results are published as a percentage of positive responses. So if the Inventory PMI is at 60, it means that 60% of companies queried have higher inventories compared to last month.

PMI surveys have many questions but the most important one, the one you should focus on, is New Orders: “is business better or worse than last month?”.

New Orders are among the earliest gauge of macro growth available. Keep an eye on them in the first days of each month.

So in conclusion you should decompose ‘US ISM Manufacturing New Orders PMI’ like so:

• 🇺🇸 US: The Land of the Free and Home of the Brave – this implies that you can have China or Japan or Italy PMIs as well
• 📦 ISM: Institute for Supply Management, a non-profit organization that conducts the survey – other institutions do the same job across the world, IHS-Markit being one of the key ones
• 🏭 Manufacturing: the mega-sector aggregate of all manufacturing industries (as opposed to “service”) - you can have PMIs for any sector
• 🧾 New Orders: new orders placed with a manufacturer - this is one of the survey questions, and the full list includes Inventories, Input Prices, Output Prices, Employment Costs, and much more
• 🙋 PMI: an index based on a survey – PMIs as a whole are a vast category of data