Overview:
Today, we got the October Consumer Price Index (CPI) report which showed an overall increase of 2.6% for the last year and 0.2% for the month. That’s above last month’s 2.4% and in-line with expectations. The Core CPI which excludes food and energy was up 3.3% vs last year and up 0.3% from last month. That 0.3% annualizes to 3.7%. Those figures were roughly in-line with expectations with the monthly Core a bit above some estimates. Seeing an increase in the CPI so quickly after the Fed started cutting the fed funds rate is a bad look, and something DKI predicted. Let’s go through the details:
The Core remains flat (and up from the prior quarter). The all-items just rose.
The Fed keeps claiming the fed funds rate is “restrictive”. I disagree.
Food:
Food inflation came in at 2.1%, down 0.3% from last month. Food at home was up 1.1% which was 0.2% below last month. Food away from home is now up 3.8% 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 1% in the past year.
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. Simply stated, even if food prices stop rising, the current level is 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. This month’s CPI shows energy prices down 4.9% vs last year. Gasoline was down 12.2% vs last year and fuel oil was down 20.8%. That’s a huge change and continued volatility. Despite geopolitical conflict in parts of the world that produce large amounts of oil, the market continues trading like significant risk is remote.
Vehicles:
New vehicle pricing was down 1.3% continuing the downward trend. Used vehicle pricing was down 3.4%, but up 2.7% vs last month. 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.
Two months ago, I wrote:
This month’s CPI report is also at odds with the Manheim Used Vehicle Index which has shown increases in the price of used cars for the past couple of months. I suspect that’s due to a timing delay and that we’ll see higher used car prices in coming CPI reports. Should that be the case, a category that has been a tailwind for CPI disinflation most of this year will start to cause increases again.
This is what we just saw. While the annual change was a decrease in pricing, used vehicles were slightly more expensive in September and October according to the CPI report. The Manheim index showed a small monthly decline.
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.
Prices down from the highs, but starting to look sticky here.
Services:
Services prices were up 4.8%, slightly higher than last month and continuing to rise consistently for years. Services prices have been sticky, and this is an area where the Fed is struggling 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 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 4.9% again and represents the largest category of the CPI. Over half of today’s CPI increase is due to just shelter. 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 some 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.
Despite the Fed cutting the fed funds rate, mortgage rates rise AND housing prices rise.
Analysis:
When the Fed lowered the fed funds rate in September, and again last week, 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 last Tuesday’s election, but increasing tariffs are now more likely.
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:
We have recognized the weakness in the productive private economy for more than a year, and excessive governmental stimulus has continued to bolster misleading GDP reports and create additional inflation. We’ve concluded that the Fed is making the “Arthur Burns” mistake and cutting too soon. Note that if we’re wrong about that, it would be because the weakness in the productive private economy became so severe that stagflation is a recognized issue. That wouldn’t be a positive for the market.
The CPI rose just one month after the Fed cut. Last month, we wrote, “It’s going to be a bad look for the Fed if the CPI spikes right after a rate cut.” President-Elect Trump has made it clear that he wants a more accommodating Fed. It will be interesting to see if the Powell-led Fed, which cut rates just before the election, will push back with a pause or higher rates in the next year.
Long-term bond yields continue rising as investors start to include higher inflation in their expectations. We’ll have more on this in next week’s 5 Things to Know in Investing. 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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