Overview:
Today, we got the August Consumer Price Index (CPI) report which showed an overall increase of 2.9% for the last year and up 0.4% for the month (annualizes to 4.9%). The annual number is up 0.2% from July and 0.1% above expectations. The monthly is up 0.2% and 0.1% above expectations. The Core CPI which excludes food and energy was up 3.1% vs last year and up 0.3% for the month. These were both consistent with last month and in-line with expectations. Let’s go through the details:
Trending up a few months in a row.
Still below 2%. The Fed is not as “restrictive” as many claim.
Food:
Food inflation came in at 3.2%, up from last month and well above the recent 1% -2% numbers that I thought were understated. Food at home was up 2.7%, a meaningful 0.5% increase from last month. Food away from home is now up 3.9%, consistent with last month. The monthly increase was 0.5% from last month with the longer-term trend up as well.
We continue to note that both the rate of increase and price levels for food purchases are creating problems in many homes. Simply stated, even if food prices stop rising, the current level remains too high for many families. I’ve seen reports of more people financing their groceries and of increasing non-performing credit statistics. This category continues to create stress for consumers.
Energy:
Energy prices remain a tailwind, rising only 0.2% vs last year. Energy was up 0.7% vs last month largely due to improved global growth expectations and geopolitical stress. Gasoline was down 6.6% vs last year, fulfilling one of President Trump’s big campaign promises. Fuel oil was down 0.5% despite efforts from the White House to further limit supply from Russia partly by pressuring India. India is resisting that pressure and is drifting closer towards Russia and China, an outcome the White House can’t be happy to see.
As I wrote last month:
The President is using tariff pressure on India to try to get them to buy less Russian oil. DKI has said many times that the anti-Russian sanctions in general, and efforts to limit sales of “Russian” oil in particular were going to be and have been ineffective. Adding tariffs to purchasers is a new tactic. We’ll see if that works, but in general, if everything the US has thrown at the Russian economy for the past three and a half years hasn’t worked, it’s time to recognize that they’ve insulated themselves from our pressure/influence.
Vehicles:
New vehicle pricing was up 0.3% for the month and up only 0.7% y/y. The monthly changes there have been very small for months. Used vehicle pricing was up a big 6.0% and up 1.0% vs last month. That’s two months of increases following four straight months of declines. After years of volatility, car prices have reached a more stable plateau (although one well above the pre-Covid levels). There’s also a substitution effect. As new cars become increasingly unaffordable, that increases demand and pricing for used cars. At this point, I think we can expect that cars will be priced permanently above the 2019 levels with substitution of used cars for new ones for those who can’t afford the new ones following years of higher inflation.
After a huge increase and some retracing, we’ve reached a more stable plateau.
Services:
Services prices were up 3.6%, the same as last four months (the definition of “sticky”). Much of the increase has been caused by higher wages. The labor picture is difficult to analyze right now because the data being provided is inaccurate. In addition, recent employment data has been slightly hugely misleading “featuring” a new record 911k downward adjustment announced this week.
The recent firing of the head of the Bureau of Labor Statistics led to wailing that the “integrity” of US data collection was being impaired. In the last three years, we’ve had downward adjustments of 258k, 818k, and 832k jobs (now add in 911k for the year ended March ’25). @JamesLavish made a convincing case that the BLS isn’t getting good data. He’s probably right causing me to ask what the BLS has been doing to improve that. The job is to produce good data that’s reliable. The inability to do that is what’s led to a loss of “integrity” and trust.
It’s also worth noting that recent decreases in jobs have been partially caused by decreases in government positions. While DOGE wasn’t able to do everything they wanted to do, any shift from the government to the productive private sector is welcome.
Finally, we’re now seeing more people looking for work than there are jobs. Despite downward job revisions, wage growth remains strong and one reason the unemployment percentage has increased is more Americans are coming off the sidelines and re-entering the labor market. As of now, the predictions by fiat economists of labor market disaster due to repatriations have not been realized.
Shelter (a fancy word for housing) costs were up 3.6% which was roughly consistent with last month and again “was the largest factor in the all-items monthly increase”. I’m seeing reports of weakness in several large local housing markets, but the overall trend has been continued increases in shelter prices. Worth noting: Because it takes a few months for housing sales to move from contract to completion, this data tends to lag by a comparable time period. As the data from these weaker markets slowly make their way into the Owners Equivalent Rent (OER) calculation, the primary reason for CPI increases will turn negative.
Still the primary reason for the increase in the CPI – not tariffs.
Conclusion:
Yet again, the big increase was shelter. Despite all the predictions of catastrophe from fiat economists relating to the Trump tariffs, disaster simply hasn’t happened. We were warned the tariffs would lead to massive inflation. That then got altered to a big one-time increase in the price level which would then be stable. Then, there were threats that tariffs would lead to decreased trade and a worldwide recession. None of that has happened. This week’s Producer Price Index report didn’t show evidence of large price increases in finished goods and the big increase from the prior month got revised down. In my opinion, the CPI and the Core CPI in particular are still too high, but the lagging OER metric means that current CPI levels may be lower than reported. (I know – I’ve been one of the people telling you the CPI was overstated for years. Housing costs may be swinging that pendulum slowly in the other direction now.)
In fairness to these economists, many have made the case that it will take a few more months for these higher prices to move through complicated supply chains. If they’re right, we should start seeing the predicted inflation Armageddon soon. If that doesn’t happen in the next two months, I’ll be interested to see if they admit error, or simply push out their expected time-frame.
I continue to believe that people are underestimating the possibility that President Trump’s threats will land us with LOWER tariffs all-around. Talks with other nations aren’t resulting in deals as quickly as many hoped, but recent deals have been struck at levels below where many feared. There have also been trillions of dollars of announcements of new US manufacturing capacity. Increased domestic supply will offset much of the fears of higher tariff-based imports. The big unknown right now is what any trade deal with China will look like and whether both countries live up to any agreement made on paper.
I have a long macro update think-piece currently in edit. In that piece, I make predictions for both long-term and short-term inflation. We’ll have that out to you as soon as possible. The DKI portfolio is well-positioned for long-term inflation, and owning Bitcoin and gold is the easiest way to profit from the continued debasement of the money supply (which will continue with or without tariffs). These are two of my largest positions and both have produced meaningful portfolio profits.
Washington DC has tried to get people focused on disinflation (a reduction in the rate of inflation). This chart shows why most Americans are experiencing more financial distress.
We continue to see signs of increasing consumer credit stress. As buy now pay later loans are being reported to credit scoring agencies, many Americans are seeing their FICO scores fall. Credit card and auto loan delinquencies are increasing. Those with student loans are now again responsible for making payments and leading to further decreases in credit quality for millions. We’ve seen reports from those with student loans complaining that they now have to reduce discretionary spending because the multi-year break from payment requirements has expired. It’s interesting that so many chose to spend this temporary break from payment requirements rather than save or invest the money. Our culture needs to have a change in our relationship with spending and debt. That change should start in Congress. (This section is unchanged from last month because these kinds of slow-moving, but important trends rarely change from month-to-month. We don’t have a “new” economy every four weeks.)
Given the recent downward revisions to the employment numbers, I agree with consensus that the Fed will lower the fed funds rate when they meet this month. I think the Fed fears a recession more than they fear inflation. Some are betting on a “jumbo” 50bp (0.5%) decrease. I think that’s unlikely. Inflation remains elevated. The real rate is below 2% which is not “restrictive”. President Trump has publicly pressured Chairman Powell making it difficult for him to reduce rates without looking like he’s caving to the White House. And the emergency policy bias is towards caution. That’s because in the event of an economic downturn, the Fed has a history of immediately using quantitative easing to flood the system with liquidity. On the other hand, a resurgence of inflation is difficult to control and Fed policies to deal with that tend to either be very expensive or to take a long time.
IR@DeepKnowledgeInvesting.com if you have any questions.
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