Today, we got the April Consumer Price Index (CPI) report which showed an overall increase of 3.4% unadjusted in the last year and 0.3% vs last month. That’s slightly below last month’s 3.5% and in-line with expectations of 3.4%. The 0.3% monthly increase was below the 0.4% expected, but still annualizes to 3.7%. The Core CPI which excludes food and energy was up 3.6% for the last year and up 0.3% from last month. Both of those were consistent with expectations. The annual number is still well above the Fed’s 2.0% target. Let’s go through the details:
This is not the disinflation story many have been celebrating in recent months.
I still don’t think current Fed policy is as restrictive as some believe. The real rate remains below 2%.
Food:
Food inflation came in at 2.2% which was the same as last month. Food at home was up 1.1% which was below last month’s 1.2%. 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 reason the CPI has come down so much in recent months (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 have now reversed and are rising again. Geopolitical conflict combined with extended production cuts by Saudi Arabia and Russia have contributed to this trend. Total energy prices were up 2.6% (vs 2.1% last month) with gasoline up 1.2% and fuel oil down 0.8%. These items had seen prior big decreases moderate to small decreases in recent months. Partly due to the production cuts referenced above, we’ve gone from energy being a tailwind for a lower CPI to a shift to a headwind. (This paragraph was largely unchanged from last month because the data has shifted from declines to increases and the absolute numbers are very similar right now.)
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.
Offsetting some of the new trend towards higher energy prices has been the success of the work from home/anywhere movement. Many workers are resisting the call to return to the office five days a week, and are reducing commuter miles. This is also pressuring commercial real estate, and the banks that lend to commercial property owners, a trend DKI has been highlighting in recent editions of the weekly 5 Things to Know in Investing. This issue has been so important that we’ve been highlighting it for the past few months in both the written and video versions.
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 0.4% and used vehicle pricing was down 6.9%. 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 made a meaningful dent in those non-temporary 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.
We’re seeing 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. 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.
Services:
Services prices were up 5.3%. That’s 0.1% below last month and 0.1% above the February data. 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.
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 was weaker, 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 5.5% and represents the largest category of the CPI. This was slightly better than last month’s shelter number, but 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.
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).
No longer down from the high. Housing is around all-time highs despite/because of lower mortgage rates.
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.
The press release from the most recent Fed meeting was slightly more hawkish in its language than the prior one, but also included a dovish tapering of quantitative tightening. Powell has been deliberately inconsistent in his guidance at times telling people that rates are already restrictive (meaning a cut could be coming) and at others, telling people that the Committee is firmly committed to getting inflation down to the 2% target (meaning they’re not cutting any time soon). Other Fed Governors have been much more hawkish in front of cameras in recent weeks.
For those of you who are inclined towards political analysis, we remind you that changes in the fed funds rate act on a lag. That means that a potential September cut won’t be soon enough for the stimulative effect to be felt in the economy before the November election. The White House was hoping for help from the Fed. Instead, they’re going to get that help from a Congress that stimulates the economy through overspending and a Treasury Department that’s monetizing that extra debt. As has been the case for years, we’re all going to be paying for our “stimmies”, government benefits, and other programs through future inflation. Powell knows this even though he’s an experienced enough political operator to avoid saying so in public.
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:
DKI has been saying for more than a year that Congressional overspending and monetization of that new debt will lead to a second round of inflation and future Fed rate hikes. Expectations of a rate cut have been pushed back to September/November based on recent high inflation data and today’s print of 0.3% monthly inflation vs the expected 0.4% will lead to expectations of more rate decreases coming sooner. I think we’ll continue to see “higher for longer” unless
Powell decides to panic and follow the lead of former Chairman, Burns, who authored the high inflation of the 1970s by reducing the fed funds rate too early.
The large increase in the price of Bitcoin this year combined with record prices for gold and rising commodity prices indicates most of the world is expecting more inflation. A risk factor that’s starting to get more attention is the Bank of Japan. The BoJ owns a massive position in US Treasuries and has already tried to intervene in the market by selling some of them to defend the yen. An unwind of the carry trade can lead to higher yields here in the US and higher borrowing costs which would then necessitate more money printing followed by higher US inflation. The VIX isn’t recognizing that risk yet, but more market commentators are beginning to pay attention to this important issue. DKI began speaking and writing about the issues with the BoJ and the yen in October of 2022.
Again, we highlight that if the reason for higher rates is high inflation/currency debasement, then that makes the long-term prospects for alternatives like Bitcoin, gold, and silver much better. If the dollar loses purchasing power each year, and harder currency alternatives maintain purchasing power, then the dollar price of those alternatives will increase.
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.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
