Hot Inflation Numbers Could Crater Stocks 5% — And Larry Summers Says Prices Aren't Dropping Any Time Soon

The Consumer Price Index (CPI) data for September will be reported on Oct. 13 by the U.S. The Bureau of Labor Statistics. Analysts at JPMorgan Chase & Co and former U.S. Secretary of the Treasury Larry Summers weighed in on what is happening and what could happen.

Why It Matters: This CPI release will be a key catalyst heading into the Nov. 2 Fed meeting, as 75 bps is the consensus after the past two Fed meetings.

JPMorgan’s Forecast: According to JPMorgan, the market is expecting the headline CPI to be 8.1% prior to August’s 8.3% reading, and core CPI to be 6.5% compared to 6.3% in the prior month.

JPMorgan’s 2022 inflation forecast is predicting headline inflation of 7.1% for the November reading and 6.4% for the December release.

After last Friday’s non-farm payroll numbers remained above expectations, it caused further concern that the Fed will remain hawkish for longer.

When looking at the bear case for the S&P 500 to hit 3,300 by the end of October, JPMorgan reported the market would need a combination of higher CPI, poor third-quarter earnings and a shock to oil prices such as the OPEC+ cutting production by 2 million barrels per day.

In the scenario of poor earnings leading into earnings revisions, the JPMorgan analysts mentioned the bank sector would need to miss expectations and issue lower guidance with a precarious view of the consumer and financial conditions.

Analyzing the bull case for the S&P 500 to go back to 4,000, investors would have to see the CPI soften, and upside earnings surprises in the Financial and Consumer sectors, reported JPMorgan.

The analysts commented that in order to see a rally in the markets, the CPI print would have to be below 7.8%, which could set up for more dovish surprises, although allowing the Fed to raise rates by 75 bps to 100 bps in its November meeting. 

Rent was the only segment JPMorgan expected to remain tight, as it forecasted tenants’ rent to rise by 0.72% in September while owners’ equivalent rent increased by 0.69%.

If headline CPI data prints above 8.3%, the market could be set up for a decline of 5%, reported Mike Ferloi.

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Larry Summers Expectations: As the typical monthly rent is $2,090 in the U.S., the growth for private sector rents from Zillow Group Inc Z was at all-time highs in January.

Early Tuesday, Larry Summers tweeted, “housing is the most important driver of inflation,” as the official inflation measure reflects rent growth for new tenants, instead of all tenants.

Additionally, Summers saw private sector rent growth slowing over the past few months, although he expected residential inflation will peak early next year and decline to more stable but elevated levels in late 2023.

Summers' model forecasts core CPI inflation to remain above 4% until late 2023, unless the core segments move below the 2% target. 

Summers mentioned inflation has not come ever down until the Fed brought the funds rate above core inflation, which is why tightening is historically followed by recession and an increase in the unemployment rate.

Photo: Larry Summers, paparazzza via Shutterstock