Overview
Today, we got the February Consumer Price Index (CPI) report which showed an overall increase of 3.2% unadjusted in the last year and 0.4% vs last month. Both of those are .1% above last month, and above expectations of 3.1% for the year. The Core CPI which excludes food and energy was up 3.8% for the last year and up .4% from last month. The annual number was above expectations of 3.7%, and was down .1% from last month. The annual number is still almost double the Fed’s 2.0% target. Let’s go through the details:
CPI still above 3%. Core still sticky at around double the target.
I still don’t think current Fed policy is as restrictive as some believe. A 2% real rate isn’t high.
Food
Food inflation came in at 3.2% which was an increase from last month’s 2.6%. Food at home was up 2.2% which was an increase from last month’s 1.2%. After seeing months of declines in food inflation, we’ve just seen an acceleration of price increases. Despite this, I continue to insist that anyone who believes that food inflation is only 2% hasn’t been inside a grocery store in years. Food away from home is now up 4.5% after seeing 5.1% 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.
From last month: “Every single person I talk to who does the grocery shopping for their household is telling me the same thing. Most of them think their food bills are up more than 20% in the past year. The reason I keep reprinting the same language here is because the BLS keeps printing the same nonsense.”
Energy
Energy has been the CPI has come down so much in recent months. While that trend continues, the declines in energy prices are much less than they were a few months ago. Energy prices are down on fears of a coming recession in multiple parts of the world. That’s been partially offset by production cuts led by Saudi Arabia and Russia. Total energy prices were down 1.9% with gasoline down 3.9% and fuel oil down 5.4%. These decreases had been large in prior months, but partly due to the production cuts referenced above, we’re getting less downward pressure on the CPI from energy than before.
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.
While many companies have pressured employees to return to the office, four years after the start of Covid, there’s still substantial resistance. Even when employees can’t get their employer to agree to permanent work from home, they’re still not back in the office five days a week. This trend which is pressuring commercial real estate, and the banks that lend to commercial property owners is also reducing demand for gasoline as people are commuting fewer days and fewer miles.
DKI hosted a webinar last month with energy expert, Tracy Shuchart, 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/.
Vehicles
New vehicle pricing was up 0.4% and used vehicle pricing was down 1.8%. 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 about half of the Covid-related spike in used car prices has disappeared.
There are increasing 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.
Still expensive and but with notable improvement.
Services
Services prices were up 5.2%. This is still very high and 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. Wages are up. The last job report showed an
increase of 275k jobs. And unemployment remains below 4%. On the other hand, many of the listed jobs aren’t real as companies aren’t actively trying to fill all “available” positions. 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.
Shelter (a fancy word for housing) costs were up 5.7% and represents the largest category of the CPI. Most 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.
Mortgage rates have declined off the peak, but not enough to encourage meaningful increases in supply. In the past, I’ve added the obvious caveat that the decision to market a house and the sale process takes months so it will be a while before we see the impact of lower mortgage rates. While true, the housing market has remained expensive much longer than most people expected (including me).
This data is reported on a multi-month lag, and housing is around all-time highs despite/because of lower mortgage rates.
Analysis
I think the Fed hoped to have inflation much lower by now. Expectations for the first rate cut have been pushed back from January to June, and the number of expected .25% cuts have fallen from six to three. This validates Jerome Powell’s “higher for longer” mantra. However, during last week’s discussions with Congress, Powell heavily implied he’d consider cutting rates before the CPI declines to 2%. This is a huge change for him as he knows the warning provided by former Fed Chair, Arthur Burns, who made that exact mistake. Burns was replaced by Paul Volker who crushed inflation by pushing the fed funds rate almost to 20%. Powell is risking a lot if he eases too quickly.
Washington DC has focused on disinflation (a reduction in the rate of inflation). This chart is why most Americans are experiencing more financial distress.
During last month’s webinar with Tracy (@chigrl), she said she thought energy prices would remain rangebound in a wide range this year. That seems likely to me as well. With Brent crude now over $80, the monthly declines in energy prices we’ve enjoyed will start to disappear. I expect energy prices to trend up over the next few years, but don’t have an opinion on where they’ll be next month.
Conclusion
The Fed had been succeeding in lowering the rate of inflation, but 0.4% for the month annualizes to almost 5%. That’s not great and means it’s almost certain the Fed won’t reduce the fed funds rate at the next meeting. We’re seeing an increase in energy prices and higher shipping costs due to geopolitical conflict. Nominal wages remain high, but real wages aren’t up much depending on the personal inflation rate experienced by the average consumer. Long
term, Congressional overspending and monetization of that new debt will lead to a second round of inflation and future Fed rate hikes. For now, expectations of a rate cut will stay at June or later. We’ll see “higher for longer” unless Powell decides to panic and follow the lead of former Chairman, Burns.
Gary Brode (917)-546-6821 IR@DeepKnowledgeInvesting.com
IR@DeepKnowledgeInvesting.com if you have any questions.
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Gary Brode (917)-546-6821 IR@DeepKnowledgeInvesting.com
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