The CPI announcement was higher than expected for the headline number at 8.6% versus 8.3% and core was at 6% versus 5.9%. The big surprise was the headline MOM which increased 1% versus .7%. There is a clear increase in inflation volatility. Volatility of 12-month changes is at the highest levels since the GFC when we had outliers on the downside. More interesting, the core volatility is increasing and closing the gap with headline inflation. Core inflation is usually more stable than the headline numbers. Volatility will increase with the level of inflation. The volatility increase in the core inflation is disturbing.
If volatility increases, there should be a decline in the sensitivity of a small change in inflation. That was not the case for Friday's number. Inflation has become the focus of investors and any change will have a heightened response. We are expecting 70s and 80s type of inflation responses and not the limited response over the last 10 years.
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