CPI was up 0.4% vs last month. This was down from 0.6% last month and was above expectations of 0.3%. This annualizes to 4.9%. There is no annual comparison because of the government shutdown last October. Core CPI was up 0.3% vs last month. This was consistent with last month and above expectations of 0.2%.
Food was up 0.5% for the month (annualizes to 6.2%). I’ve been saying forever that this category has been understated and we’re now seeing big increases. Earlier this year, I suggested that fertilizer that wasn’t coming through the Strait of Hormuz would impact food prices. That, plus higher prices for diesel, would be big contributors to this month’s increase.
Food away from home was also up 0.5%. Higher prices plus constantly shifting tipping expectations are making eating out more difficult. In previous CPI analysis I’ve commented that the waiters who insist that if you’re not going to tip at least 25%, you don’t “deserve” to eat out are going to end up with 100% of nothing. I’m currently in Tokyo where my favorite sushi place has 2 sushi chefs. You order via an app. The chef puts your food in front of you. A runner/cashier brings you soup and drinks, and runs your credit card at the end of the meal. The entire restaurant is staffed by three people. Service is fantastic and there’s no tipping. I think we’re going to start seeing ordering via apps in more places in the US and more restaurants will find Japanese-style ways of reducing service staff even before we get robot waiters.
Energy up 0.6% which annualizes to 7.4%. This isn’t great, but is much better than recent months. Gas was up by 1.0% in the month, but I’m reading daily reports that it’s back under $4/gallon. Somehow that happened immediately following the election. Fuel oil was up 2.0% which isn’t great, but it’s a meaningful improvement from last month’s 15.3%. For the first time in a while, energy was not a massive outlier for the CPI.
I’ve been saying since June that the war in Iran isn’t heading for a quick close because there isn’t overlap between acceptable end conditions for the Iranian Mullahs and President Trump which makes any ceasefire temporary. Prior to the election, President Trump was saying he was going to start bombing Iran this week. This week, President Trump was saying he’s probably done bombing Iran. I’ve been saying all along that trying to trade commentary on the war (from the President, the press, or X) is pointless because the “news” changes constantly. I reiterate this opinion.
Shelter (housing) was up 0.3% for the month and accounted for 30% of the all-items increase. This has been a huge contributor to the CPI for half a decade despite multi-year analysis by housing experts showing weakness in some markets, home builders offering incentives, and mortgage prices that are both typical for the US and well-above Fed-fueled multi-year lows. I’ve been seeing warnings of a collapse in housing prices for years. That doesn’t mean these analysts and economists are wrong, but the kindest evaluation is that they have been very early. We’re not going to see 3% mortgages again so if you’re looking at buying a house, don’t wait for that to happen. Figure out what you can comfortably afford based on the current rate.
The equity indexes, Bitcoin, and gold are all down in pre-market trading. That’s because the higher-than-expected means the Fed is likely to raise the fed funds rate at the next meeting. This is both likely to happen and also is consistent with market expectations. Higher interest rates mean a higher discount rate on the high-growth tech stocks which have been leading the market. Higher rates also mean a more challenging comparison with zero-yield assets like gold and Bitcoin. Please note that this is a short-term challenge for the zero-yield hard assets as inflation reduces the long-term purchasing power of the dollar which leads to higher dollar prices for them.
I also don’t think the Fed matters much here. Market commentators think the Fed controls interest rates because for most of our careers, the Fed had enormous influence. I think inflation is being driven by excessive spending in Congress, something that wouldn’t have changed regardless of which team won last week’s election. That excess spending is being funded by new debt which amounts to dollar creation. A larger number of dollars chasing the same number of goods leads to higher prices.
The Fed has enabled this, but they aren’t causing it. The bond market is correctly pricing in higher future inflation leading to higher yields on the 5-year Treasury which influences corporate borrowing rates and the 10-year Treasury which influences mortgage rates. So, the Fed will hike and it won’t matter.
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