I’m currently on a train which is why today’s CPI report is late. I also think the previous 9-10 page commentary was helpful when I started writing it every month, but is no longer serving us well. The CPI report does matter, but it’s not driving markets like it did in ’22, ’23, and ’24. In addition, the economy doesn’t change completely from month to month so much of my commentary would get copied and pasted from the previous month. That meant DKI readers were getting 9 pages of content with approximately 3 pages of new analysis and 6 pages of carryover from previous months. I’m going to shift this to a shorter bullet point format in an effort to give you a better signal to noise ratio. The goal is to reduce your reading time while limiting commentary to whatever is new/different/important.
Let me know what you think. Do you like this format better, or did you really like the previous long-format template?
CPI of 3.8% was 0.1% above expectations. The monthly change of 0.6% is both high and in line with estimates.
Core CPI of 2.8% was 0.1% above expectations. The monthly change of 0.4% was high and 0.1% above estimates. The huge difference between CPI and Core is due to energy which was not a surprise.
Food was up 3.2% and 0.5% for the month. I’ve been saying forever that this category has been understated and we’re seeing increases. Note that fertilizer isn’t coming through the Strait of Hormuz and food depends on fuel for tractors and transportation. This is a geopolitical and energy-related increase. I’m still seeing constant posts from waiters that if you don’t want to tip 25% – 30%, you don’t deserve to eat out. Those statements will backfire as people don’t go where they don’t feel welcome and these complaints aren’t persuasive.
Energy up 18%. Gas up 29%. Fuel oil up 54%. This is the whole CPI report here. This accounts for 40% of this month’s CPI increase. We know the reason. I don’t expect a quick solution. As before, DKI owns assets that benefit from inflation and we have a substantial energy portfolio.
New vehicle prices roughly flat. Used vehicle prices down 2.7%. That’s a plus although it could indicate that consumers are tapped out and holding off on buying a new (used) car.
Shelter (housing) up 3.3% and up 0.5% for the month. This remains a high and increasing category accounting for much of this month’s rise.
Conclusion: The market is realizing something we’ve discussed here often. The Fed doesn’t have room to cut right now. Last month, several Fed Governors had a tightening bias. Expect more of them to advocate for a rate increase at the next meeting. We return to “higher for longer”. Much of the increase in the CPI relates to a war-related increase in energy costs. That will take some time to resolve so the Fed may not have the time they want. Either way, no one believes the Warsh Fed is about to cut right now.
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