KBRA analyzes the latest Consumer Price Index release from the Bureau of Labor Statistics and its implications for the credit markets.
The worse-than-expected result makes it more likely that the Federal Reserve will adopt an even more hawkish tone to its tightening of financial conditions, which will, in turn, increase the probability of recession over the near term. Able to impact only the demand side of the equation (but still needing to bring inflation materially lower), KBRA believes the Fed will tighten aggressively to make up for the lack of progress on the part of the equation it cannot control, namely, supply constraints.
Important mitigating factors include the strength, in the aggregate, of consumer and commercial balance sheets and the current level of interest rates, where yields are relatively low in a historical context.
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