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Inflation Comes in Hot Again – and Still Understated – 8.3%

The August Consumer Price Index (CPI) just came in at 8.3% (prices up .1% from last month).  Market watchers were expecting a CPI of 8.1% and prices down .1% from July.  Whether the report showed 8.1% or 8.3%, it’s a huge number.  To give you a sense of how bad 8% inflation is, at that level, over a 40 year working life, your dollars would lose 95% of their value.

We continue to believe that the CPI is hugely understated.   Food (up 11.4%) is getting closer to reflecting reality, but we still think that’s understated (depending on the makeup of your particular grocery cart).  The big number is in shelter (housing) where the CPI shows a price increase of 6.2%.  That’s simply not realistic for anyone going to buy or rent a home right now.  The Case-Shiller Index shows pricing up 22.7% (this index lags by a couple of months but is more accurate than the numbers from the Bureau of Labor Statistics).  Adjusting for shelter alone, gets us to an inflation rate of 13.8%.  Add a bit for food under-counting, and we continue to believe that real inflation is in the mid-teens, and that real interest rates are still below negative 10%.

The “Core” CPI which excludes food and energy was up 6.3% which was above the 6.1% expectation.  The overall numbers were helped by energy and used cars where pricing was still far above last year’s numbers, but have come down in the last month or two.

Somehow, the market was surprised by this announcement.  The futures market for the S&P 500 (ticker: SPY) went from up .85% pre-announcement to down 1.99% now (a quick move of 2.8%) and the futures market for the NASDAQ (ticker: QQQ) went from up .85% to down 2.63% at the time of this writing (a move of 3.5%).  We should expect continued Fed rate hikes including another 75bp (.75%) later this month.

 

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