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June CPI is 3.0%.

This piece was originally published on July 11th, 2024

Overview:

Today, we got the June Consumer Price Index (CPI) report which showed an overall increase of 3.0% unadjusted in the last year and DOWN 0.1% vs last month. That’s below last month’s 3.3% and expectations of 3.1%. The 0.1% monthly decrease was below the 0.1% increase that was expected. The Core CPI which excludes food and energy was up 3.3% for the last year and up 0.1% from last month. Both of those were 0.1% below expectations. The annual number is still well above the Fed’s 2.0% target although for the second month in a row, the trend is pointed down from recent months. That’s especially true when looking at the monthly changes in the all-items CPI which just showed deflation. Let’s go through the details:

Still more to go, but this is looking positive for the doves.

Now above 2%. Still not “restrictive”, but tighter than before.

 

Food:

Food inflation came in at 2.2%, up 0.2% from last month. Food at home was up 1.1% which was above last month’s 1.0%. I write this every month, but I continue to insist that anyone who believes that grocery prices are up only 1% hasn’t been inside a supermarket in years. Food away from home is now up 4.1% roughly the same as last month. Anyone who’s seen the recent posts about bills of more than $20 for a burger, fries, and soft drink at fast food places won’t believe this number either. 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.

 

Some people who I respect are saying that food prices really are up a small amount from last year and that consumers are still experiencing sticker shock based on the huge price increases we saw in 2022 and 2023. I acknowledge that may be a possible explanation, but either way, the official numbers show increases of 20% – 30% over just a few years, and many people I talk to are seeing multi-year price increases substantially higher than that. Whether the big move came in 2022, 2023, or is continuing now, both the rate of increase and price levels for food purchases are creating stress in many homes.

 

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 the primary reason the CPI has come down so much in recent months and that trend continued this month as well (disinflation not deflation). That trend was never going to be sustainable especially given the desire of many western governments to limit hydrocarbon production. Energy prices are up only 1.0% from last year, but were down 2.0% in June from the prior month. Gasoline was down 2.5% vs last year, but down 3.8% in the month. Those are big declines at the start of the summer driving season here in the US. Fuel oil was up 0.8% for the year and down 2.4% vs April. Energy prices had risen due to the production cuts in Saudia Arabia and Russia, but have been down recently on fears of a worldwide recession. Those recent declines have become a multi-month trend.

 

In previous editions of this report, we’ve highlighted the White House strategy of draining the Strategic Petroleum Reserve (SPR) to get fuel prices down ahead of elections. With a contentious Presidential election on the way and a White House desperate to convince Americans the economy is in good shape, DKI doesn’t expect any meaningful replenishment of the SPR. In fact, there are credible rumors that the Administration is considering selling down the SPR ahead of this fall’s election. That’s a dangerous strategy as it sells off a strategic resource just ahead of the fall hurricane season. We’ll all be hoping for good weather in the gulf this September and October.

 

DKI hosted a webinar earlier this year with energy expert, Tracy Shuchart @chigrl, to discuss oil and gas, uranium, and geopolitics. For those of you who want to understand this important part of the economy better, please feel free to check out the full video here (not paywalled): https://deepknowledgeinvesting.com/tracy-shuchart-and-gary-brode-on-energy/. Tracy predicted that oil would be range-bound with a relatively wide range, and so far, that prediction has been accurate.

 

Vehicles:

New vehicle pricing was down 0.9% and used vehicle pricing was down 10.1%. 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. It will be interesting to see the effect of more manufacturers slowing the emphasis on money-losing electric vehicles and returning their focus on profitable internal combustion cars and trucks. The White House is now looking at massive tariff increases on Chinese EV imports. While that’s not a big percentage of the market right now, we’ll be watching to see how the higher prices and reduced competition affects the future domestic market.

 

A couple of years ago, the massive increase in car pricing (especially used cars) was responsible for almost half the increase in the CPI. Now, more than half of those price increases have reversed. This isn’t disinflation; but rather the price of cars actually declining. It’s interesting that despite the big decrease in car pricing and lower energy prices that the CPI remains as high as it is.

 

We’re seeing continued reports of used vehicle loans going delinquent. New car pricing is still high enough that $1,000/month auto payments are far too common for stretched consumers. It’s likely that this part of the CPI will continue to decline in upcoming months. We’ve been highlighting the increasing use of buy now, pay later in recent versions of the 5 Things, and believe that officially-reported consumer indebtedness is understated. Many BNPL users are now falling behind on other debts. We expect this trend to increase in the near future.

Still expensive but with meaningful and continued improvement. Prices heading towards “normal”.

 

Services:

Services prices were up 5.1%. That’s similar to last month’s 5.3% increase and still too high. Again, services prices have been sticky, and this is an area where the Fed is struggling to bring down inflation. This 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 increases in employment along with decreases in available jobs (especially in the private sector).

 

However, 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. Finally, these figures are constantly revised downwards. We keep seeing positive initial reports while the historical numbers get adjusted by so much that the current month “beat” isn’t enough to show actual growth. Recent employment data has been mixed, but given the inaccuracies and inconsistencies in multiple data sets, and the constant huge revisions, it’s difficult to get a real handle on the labor market. As we’ve said before, there’s been no growth in full-time employment in years. That means the growth in jobs has been people taking on second and third part-time jobs. More people aren’t working. The same people are working more to make ends meet.

 

Shelter (a fancy word for housing) costs were up 5.2% and represents the largest category of the CPI. Much of today’s CPI increase is due to this category alone. Housing has 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.

Housing prices remain at all-time highs even with mortgage rates up from three years ago.

 

Analysis:

In the fourth quarter of 2023, the market expected six rate cuts for a total of 1.5% with the first cut coming in January or March. DKI disagreed strongly and said we’d get fewer cuts coming much later. In recent weeks, market expectations had been reduced from six cuts to just one or two with the expectation that the first one would come in the fourth quarter. Some Fed Governors have been talking about raising rates again, but we doubt the Fed will want to incur accusations of partisan activity by changing the fed funds rate so close to the November elections.

 

Recently, given a few signs of economic weakness, the markets have been betting that the first rate cut will come in September. Following today’s lower-than-expected CPI, the market is now assigning an 80%+ probability that the Fed cuts in September. I’m not so sure about that. Powell recently spoke in Europe about the strong US economy giving him time to wait and watch. He also (correctly) blamed Congress for approving unsustainable inflation-causing stimulus spending. Lately, he’s made it clear that he doesn’t want to cut until he’s sure inflation is heading “sustainably” back to the 2% level. Finally, the optics of a non-partisan institution like the Fed stimulating the economy just before an election are something I suspect Powell would prefer to avoid. If I’m wrong about this, and the Fed cuts in September, I think it will be because the economy weakens considerably over the next 6-8 weeks. Given the amount of stimulative spending coming out of Washington, I think that’s unlikely.

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:

Today’s CPI was below expectations with continued improvement in the Core CPI. With the monthly change below zero, many will claim that we’ve now entered deflation from disinflation. I continue to believe that food costs are understated and that we shouldn’t count on continued lower energy prices (which doesn’t affect the Core number). The equity indexes are trading up in the pre-market due to expectations that today’s CPI will encourage the Fed to lower rates sooner. As described above, the market is expecting more than an 80% probability of a Fed rate cut in September. While I can no longer say that’s not a possibility, I think the probability of a September cut is much less likely than the market expects. My base case scenario is one cut in December. Again, what would make me wrong is a downturn in the economy in the next two months.

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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