The U.S. Bureau of Labor Statistics reported a May Consumer Price Index (CPI) of 8.6%. This was above last month’s 8.3%, representing an increase in inflation as opposed to the hoped-for decrease. Market forecasters were expecting 8.2%. and Yahoo Finance described the 8.6% number as “unexpectedly” high.
This wouldn’t have been “unexpected” to any reader of DKI as we’ve been preparing subscribers to invest for higher-than-expected inflation since last November and have had a huge market short position since the first week of January due to the same thesis (high inflation forces the Fed to raise rates which takes down stock prices). Let’s go through the details and our calculation of real CPI:
Headline number is 8.6% and we note that the actual report from the Bureau of Labor Statistics admits that there were 72 “adjustments” to pricing. We reiterate our skepticism that the government is adjusting inflation statistics upwards making inflation look worse. Of greater significance, we look to the housing inflation number (termed “shelter” in the report) and find exceptional amounts of nonsense. We’ve been writing about the enormous difference between actual housing costs and the CPI’s owners’ equivalent rent numbers for months. Today’s CPI showed an increase in the price of shelter of 5.5%. We’re asking any of you who have bought a new home or rented a place in the last 12 months: Do you believe housing prices are up only 5.5%?
The more-accurate Case-Shiller Index shows housing prices up 20.6%. That number is always a couple of months behind, but even delayed, is more accurate than owners’ equivalent rent. At 33% of the CPI, actual housing prices would add another 5.0% to the index bringing it to 13.6%.
Now, we turn to food prices. The inflation numbers for food have been increasing steadily, and last month was 10.1%. We’re skeptical of the overall number and also of the food away from home inflation number of only 7.4%. Again, if you’ve eaten in a restaurant lately, do you think prices are up only 7.4%? The United Nations FAO Index (food index) is up 23% year/year. Americans eat a high-protein diet which is expensive, and we don’t believe that U.S. food inflation is anywhere near the 1/4 to 1/2 of the world food price index we’ve seen in recent months. One might argue that the “strong” U.S. dollar is helping here (vs other currencies), and that’s accurate, but we also counter by noting high use of expensive food and lots of expensive diesel are needed to truck food across a very large country. At 14.3% of the CPI, if actual food inflation were 20%, we’d add another 1.4% to the CPI.
That, plus 72 adjustments is how we continue to calculate actual inflation as experienced by the average American somewhere in the mid-teens.
Two additional points: First, gasoline is up 49% (that seems low to us) and fuel oil is up 107%. That’s hurting a lot of people who were happy they got 5% raises. Second, we’ve pointed out in prior posts that Fed rate hikes are going to “work”. Higher interest rates are already leading to sharp increases in mortgage rates which are in turn making housing appear much more expensive based on monthly mortgage payments. Right now, the market at the low end and middle is locked up with declining transactions. When the market clears at lower housing prices, it will look like the Fed has tamed inflation. This will be technically true except here’s the problem: housing prices as experienced by a home buyer won’t be any lower. While they’ll enjoy buying a home for a cheaper price, the higher interest rate on the mortgage will eat up those savings. The CPI will drop, but homeowners won’t be better off.
If you’ll forgive a promotional moment here: DKI warned about inflation 7 months ago and helped subscribers prepare. We told subscribers to short the market in early January of this year on the same thesis. And while “Hurricane Dimon” and JP Morgan just figured out there “might” be a problem at some point, we’ve spent months writing about how the CPI is understated and that the Fed is very late in raising rates.
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