Overview:
Today, we got the December Consumer Price Index (CPI) report which showed an overall increase of 2.9% for the last year and 0.4% for the month (annualizes to 4.9%). That’s above last month’s 2.7% and above the prior month’s 2.6%. It was in-line with expectations. The Core CPI which excludes food and energy was up 3.2% vs last year and up 0.2% from last month. Those figures were down 0.1% from last month and slightly below the 3.3% expected. Let’s go through the details:
On the blue line, you can see where the Fed cut rates.
Below 2% and falling.
Food:
Food inflation came in at 2.5%, up 0.3% from last month. Food at home was up 1.8% which was above last month and still understated. Food away from home is now up 3.6% roughly the same as the last few months. I write this every month, but I continue to be skeptical of this part of the CPI, and have been for the past two years. It seems understated to me and I’ve yet to find someone who will tell me their grocery bill is up only 2% in the past year.
While I’m critical of the accuracy of reported food inflation, I’ve been reading more articles noting increases in worldwide food prices. Even if the reported levels in the US are understated, the direction is telling. Seeing the food at home category rise from 1.1% to 1.8% in just two months is an indication of future problems if that trend continues. This is especially true as more Americans are eating at home to save money. I’m reading more articles about restaurants closing and wait staff making less money. If the money-saving move becomes uneconomical, we’ll see a continuation of the trend we’ve been discussing for months in the 5 Things where consumers are shifting their purchases away from luxury goods and discretionary buying towards necessities.
We continue to note that both the rate of increase and price levels for food purchases are creating stress in many homes. Simply stated, even if food prices stop rising, the current level remains too high for many families.
The reason I keep reprinting the same language about understated food inflation is because the BLS keeps printing the same nonsense.
Energy:
Energy has been an overall tailwind for the CPI following the huge increases in 2022, and is the key reason today’s CPI print wasn’t higher. The report showed something interesting. While energy prices were down 0.5% from a year ago, they were also up a huge 2.6% in the past month. So, we saw big decreases in energy prices throughout much of 2024 with a big increase in December. Gasoline was down 3.4% y/y, but up 4.4% in December. Fuel oil was the big mover showing a 13.1% decrease for the year, but a 4.4% increase from November. If energy prices stop falling, it’s going to be a big headwind for the Fed in 2025. Incoming President Trump is more energy-friendly than his predecessor and is focused on reducing energy costs, so new policies out of the White House are likely to be a help to the Fed in the coming year.
Vehicles:
New vehicle pricing was down 0.4% continuing the downward trend although monthly prices have been up in three of the past four months. This means that price decreases we saw earlier in the year are being partly undone. Used vehicle pricing was down 3.3%, but up 1.2% vs last month. Again, we’re seeing recent price increases in items that have been a tailwind for the Fed for most of 2024. These have been volatile categories. We’d also note that the decrease in used car pricing is off of a huge increase. Still, if you look at the chart below, you can see that after the enormous Covid-related run-up in used car prices, recent decreases have retraced more than half of the Covid-related price increases. Pricing is returning towards the “normal” trend and the more recent trend is towards a return to higher prices.
I typically include a warning here that many Americans have car payments above $1,000 per month and that delinquencies are rising. That remains true. Americans’ use of credit across the board and delinquent accounts are both increasing. In last week’s 5 Things we noted credit delinquencies in credit cards, auto loans, and commercial real estate that are reminiscent of 2008.
Prices down from the highs, but starting to look sticky and climbing a bit.
Services:
Services prices were up 4.4%, slightly below last month and continuing to rise consistently for years. Services prices have been sticky, and this is an area where the Fed has been struggling for years to bring down inflation. That is partly because much of the increase is caused by higher wages. The labor picture is difficult to analyze right now because the data being provided is inaccurate. Wages are up and the jobs reports show slowing increases in employment along with a general trend towards decreases in available jobs (especially in the private sector). The jobs numbers have been consistently revised downward following positive initial announcements, and there have been multiple huge restatements of this data all showing fewer jobs than originally reported. This trend of inaccurate employment data with massive revisions is accelerating. More importantly, too many Americans are suffering real wage reductions where their raises aren’t keeping up with the inflation they’re experiencing.
All of the new jobs are part-time and almost all job growth is coming from government and health care which is largely funded by government. That’s telling you the public market is throwing money into the economy while private businesses aren’t doing as well. I’ve written at length for years about positive employment data that is later quietly revised downwards. The “data” is so unreliable that it’s no longer useful.
Shelter (a fancy word for housing) costs were up 4.6% again (consistent with last month) and represents the largest category of the CPI. In last week’s 5 Things, we wrote about higher housing prices, higher mortgage rates, and increasing numbers of “spec” houses where builders build with no buyer under contract. What could go wrong?
Housing prices have remained strong as people are reluctant to sell their homes and move when higher mortgage rates mean a new smaller home might have higher monthly payments. This has kept supply off the market and prices high. Right now, despite a decreasing CPI, home affordability is terrible for most Americans. There are increasing numbers of markets where home prices and rent levels have started to decline, but that hasn’t made its way into the national figures yet. There were expectations that the recent Federal Reserve rate cut would make mortgages cheaper, but instead, higher inflation expectations are raising the yield on both long-term Treasuries and mortgage rates.
We were told Fed hikes would lower home prices. They didn’t. We were told lower rates would improve affordability. They didn’t.
Analysis:
When the Fed lowered the fed funds rate in September, and again in November, DKI warned of the “Arthur Burns” problem. Burns was the Fed Chair who reduced the fed funds rate while inflation was on the way down, but not under control. That’s where we are now with the Fed cutting into above-target and now-rising inflation. With Congressional overspending (regardless of which party is in control), there’s continued inflation-causing stimulus. We’re printing dollars to pay the interest on the dollars we printed last year. At this point, there’s little the Fed can do. Raising rates to the level where they’d need to be to offset this stimulus would lead to higher interest expense and a further increase in the money supply to pay that. They’re stuck.
Even if the CPI went to zero, there’s still the issue that current price levels for necessities like housing, cars, and food are too high for too many families. The current response out of Washington seems to be for more government subsidies. Potential price controls were defeated during November’s election, but increasing tariffs are now more likely.
This section remains unchanged from the last two months because the fiscal landscape for most Americans doesn’t change that much from month to month. DKI has predicted an increase in inflation and that’s what we’ve seen multiple months in a row.
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.
Conclusion:
The productive private market economy is weak while the government continues to supply stimulus funds by the trillions. DKI warned all summer that the Fed was cutting rates prematurely, and several months of higher CPI figures (no matter how inaccurate) are leading more market participants to embrace our conclusion. Earlier this week, there was more talk about the Fed having to raise the fed funds rate in 2025 which would be embarrassing so soon after the recent rate cuts. Right now, the pre-market indexes are up huge solely because the Core CPI came in at 3.2% which was 0.1% below expectations. That will quiet the rate hike talks for now. I’ll suggest the market is making too much of a very small discrepancy between the data and expectations.
A bigger concern for me is that the Fed has started to appear openly political. Cutting the fed funds rate just before the November election gave the appearance of political favoritism. Almost everyone at the Fed subscribes to the current MMT school of unlimited money-printing, and their disdain for President-Elect Trump is an open “secret”.
Recent Fed minutes indicated several Governors think they need to raise rates to deal with the coming inflationary policies of President Trump. DKI said many times in 2024 that both parties spend too much, both parties pursue inflationary policies, and that no matter who won the election, we’d have more inflation and a continuation of our ever-climbing debt problem. Cutting rates during the massively inflationary policies of the current White House while expressing public concern about the likely inflationary policies of the future White House makes the Fed look partisan. It will make a wobbly institution look less trustworthy during future policy decisions.
Long-term bond yields continue rising as investors start to include higher inflation in their expectations. DKI has said recently that if/when the 10-year Treasury hits 5%, it’s not likely to be positive for the equity markets. The real solution to all of this isn’t going to be action by the Fed; but rather, reduced spending out of Washington DC. That’s not going to happen so make sure your portfolio is prepared for more coming inflation.
IR@DeepKnowledgeInvesting.com if you have any questions.
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