The market has overreacted to the last two consumer price index (CPI) reports. We had an overdone rally in response to the July report that was much cooler than expected, and today we had an overdone selloff in response to a hot report for August. There seems to be some noise in the CPI data lately, which usually has smoother trends up and down. If you average the last two months of CPI data, you get monthly core inflation of 0.45%, or about 5.5% annualized inflation. So we’re not exactly in hyperinflation territory, and commodities like crude oil are moving down on sluggish demand.
It appears likely that there were a lot of sales in July to prepare for the Fall Christmas shopping season and clear out inventories that build up in the first half of the year, such as sales on summer apparel, consumer electronics, car tires, and car batteries. Then prices may have bounced back up from July sale prices in August. This happens every year but there may have been an unusually large amount of merchandise on sale in July this year. Trading volume was not that heavy today compared to big down days in the first half of the year, so this was more of a buyers’ strike today. This selloff could stop quickly if the Producer Price Index report is close to expected numbers tomorrow. It looks like large institutions were expecting some downward volatility in September and were positioned with large hedges to offset a substantial part of this downward move. There’s no sign of panic today, just a September buyers’ strike.