The Truth About Inflation: Analyzing the Latest CPI Report — Market Takes

[00:00:00] Speaker 1: Welcome in, welcome in everybody, welcome to another exciting edition of Market Takes. You know, I say that a lot, I say it's an exciting edition. Today is exciting. Listen, the market is moving in some very interesting ways. Stocks have gone up, they've gone down, bond prices are moving all over the place, the dollar is doing what the dollar does. I got you. Listen, I know you could have been anywhere in the world, but you're here with me on Market Takes. I want to say thank you for that. We are breaking down everything that happened with the release of this morning's consumer price index, the CPI report on inflation, talking about what's in the report, what's happening, what's going on. We're going to be breaking all that down. Of course, we're going to be talking about the market reaction. We're going to be talking about the current environment, right? Everything that led us into the CPI report today, as well as what's going on right now and what we can expect to come. And of course, what comes next, what reports you need to be watching for, what Fed speakers, all that good stuff to look out for in the future. So without further ado, without more chitter chatter, let's get into what matters. I like to do a little rhyming here and there. Listen, what the CPI report said, if you haven't heard by now, inflation rose 6.5% year over year and declined by 0.1% month over month. Now, this continues the falling trend of inflation that we have seen over the past six months. As you're seeing right now on your screen, CPI peaked in June. That's that big, that high number. You see the rapid increase up through June's 9.1% reading and then a decline ever since then. So what's got the market so excited or what has had the market so excited really over the past month, but specifically over the past week has been this declining trend of inflation and expectations for the Fed to slow its roll and kind of, you know, really sort of shift to a different and more easy stance. So just wanted to throw that up there to illustrate what we have seen and what the current and consistent trajectory has been for CPI. And that has been for the inflation numbers to come down. And we saw that continue this month with that 6.5% reading after November, 7.1% reading. But again, keep in mind, we are still very far away from the Fed's 2% target. The Fed wants inflation at 2%. As of December, it was at 6.5%. That's still a big difference. You have to keep that in mind. A lot of folks in the markets not really seem to think about that. The reading came in right on the screws. This is what economists had expected from the year over year to the month over month, at least the economists surveyed by Dow Jones. Some of those other economists, they got it wrong. But the Dow Jones market economists had predicted 6.5% year over year and negative 0.1% month over month. Also, the core inflation readings, Dow Jones economists had predicted, I'm sorry, 5.7% year over year and 0.3% month over month. That's the core when you strip out food and energy, which those prices can, or those rates can move a lot up and down. You strip those out, you get the core prices. That was an increase of 0.3% month over month and 5.7% year over year. Again, right on the screws, exactly what economists had predicted. Listen, those numbers tell you part of the story. The big picture takeaway when we're talking about what matters to the market, what matters to the economy, what matters to the Federal Reserve is we are seeing goods inflation decline consistently and really turn lower. But we are seeing services inflation rise higher. And that matters for a couple reasons. Now, number one, goods inflation had really driven the cost up and driven this inflation that we had seen up higher. That's used cars, new cars, things like goods and those sorts of things, gas and all that. That really drove the wave that we saw of inflation up to that 9% rate that we saw in June. That's been coming down very consistently. But what we have also seen is they pick up in services inflation and services make up about 80% of the economy. So overwhelmingly, most of what drives the U.S. economy forward is services. And we are seeing inflation there rise as goods inflation is coming down. So that is a big concern for the Federal Reserve. We've seen Fed Chair Jerome Powell really point out that services inflation component, especially services inflation minus housing. And so we're going to talk a little bit about that. Goods declined by 1.1% on the month, and that's about 39% of the overall CPI. Services make up 61% of the CPI, and that was up 0.6% and 7.5% on the year. So listen, services minus shelter was 0.4%. So we are seeing those services numbers start to inch up and get higher. Services overall was up about 7% year over year and 0.5% month over month. That's actually an increase from November. So while we've seen overall CPI declining, because goods prices are declining so much and falling, services inflation, which makes up a larger portion of the economy, a bigger percentage of the economy, those prices have been increasing kind of consistently. And that's a bit worrisome. So that's why you're seeing some of this push and pull in the markets with prices kind of jumping, then falling, then falling, then jumping. And investors aren't really sure what to make of this report. We're going to try to break it down a little bit more for you here. This has kind of been a thing where, you know, the pandemic really pushed up goods prices. Everyone was sitting at home. You couldn't do much. You couldn't go out. Couldn't go out to eat. Couldn't go to the bar. You know, a lot of those services weren't really being used. You weren't going to the barbershop, things like that. Well, as the economy is shifting now back into gear, folks still have a lot of that excess savings pent up from those stimulus checks, you know, the STEMI, from a lot of those funds that went out for the child care tax credits, things like that, that government money, that enhanced unemployment that folks got. And now instead of spending it on just buying stuff from Amazon, sitting at home on the couch, you know, you're buying things on your phone, doing things like that. Well, now they're going out. They're getting an extra haircut. They're going, getting a more expensive haircut, maybe taking expensive trips, things like that. And we're seeing those services prices start to rise as goods prices are coming down. And so one thing you may not be seeing is this increase in services prices. The Fed has really pointed that out and that could give them some more ammo to raise rates and to keep rates high as they've said they plan to do. So the Fed has really been clear. They don't plan to cut rates at all this year, 2023. The market is very clear that they expect the Fed to cut rates this year. And so you've got this kind of back and forth. Energy down 4.5% in the report. Food up 0.3% month over month. Food at home up 0.2%. The food index up 10.4%. But again, that's slower than it was in November. And so did this declining pace. Anyway, the shelter index, which is the big one that's housing, that's the piece of this that, you know, really is getting, I think, missed by a lot of the bulls out there. Shelter index is still rising. A lot of folks have said, well, shelter is a lagging indicator. Really, most folks sign a new lease at the beginning of the year. And then those prices just kind of get filtered into the index as you go on. That's correct. But that doesn't mean you should ignore what's happening with shelter. That's rent prices, owner, well, the owner equivalent price is basically what you're paying on your mortgage and or owner equivalent rent. If you were renting from someone who owns a house, you are paying owner equivalent rent. So the shelter index was up from November, actually increased, and was near the highest it's been or the highest it was for all of 2022. We know shelter is a lagging indicator, but it is still high. And the Federal Reserve wants to make sure they quash inflation. So shelter is going to be a big part of what they look at. Anyway, let's move on to the market and what the market reaction was to this data, because we have seen, really, indexes move across the board, in particular the stock market. As we look out right now, the Dow has just turned positive. Really, we saw futures for the Dow spike higher. Then we saw them go lower. Now they've just moved up to kind of positive, and you're seeing a rebound. Again, there's been this push and pull. You know, some of the bulls bought ahead of time before the market opened, and you saw futures for the Dow, the S&P, the Nasdaq really spike higher. And then once the market opened, you saw them just kind of come crashing down, a lot of folks selling their stocks. And now you're seeing the Dow come back up to about flat on the day. The Nasdaq is still down about 0.6%. S&P down about 0.4%. You are probably going to see a lot of that as we go forward throughout the rest of the day, because you've got two different tacks you can take. You can say, okay, inflation's coming down. If I look at the headline numbers, we're seeing a positive trend for inflation. That means the Fed can chill out, lay back, not do as much. Or you can say, you know what? I dug into the numbers. I see the shelter number. I see services. Oh, this is bad. Let me sell. And you're seeing a lot of that in the stock market right now. As we look out in the bond market, I think that's been very interesting, because the longer dated notes, the 10-year and the 30-year government bonds, those yields are actually rising. You're seeing higher yields, which means expectations for more inflation, more growth, things like that. And we did see, again, initially those bond yields went down. Bond investors were buying bonds, looking bullish about the future. Now those prices are going back up. So you're seeing a little bit of this back and forth, really, across markets. As we look out across the curve, you know, you saw, again, yields come down. Now they're kind of rising back up. As we look at the currency market, you've got the euro and the dollar. The dollar index was really down to start the day immediately after the release of the CPI report. We're seeing a lot of that momentum come off. And one thing I want to point out, especially right now, that I think is particularly important is commodities. We're seeing oil futures up by about 1%, some of that momentum coming off. But oil up about 1% right now. Gold had been up as much as 1%, now up about 0.3%. Silver has been up as much as 3%, now up about 1.3%. Natural gas up 5%, big day for natural gas. But Dr. Copper, which is a big tell on what folks expect for the U.S. economy, is down by about 0.6%. We're seeing that big increase in gold and a commensurate increase that had been in copper until today. I think the move in copper is very telling. It tells us there are some worries about the state of the U.S. economy and what this could mean going forward. Definitely going to want to watch copper, going to want to watch gold, because those two usually mean it move in opposite directions. They have been over the past month or so moving together. Usually gold means folks are bearish, they're worried, they think interest rates are going to decline because you don't get paid any interest on gold. So holding gold is something you do instead of holding bonds. And if bonds are paying a lot, you don't want to hold gold. Well, now gold is rising back up. It's near $1,900, $1,900 per ounce. And that's the highest gold has been in quite some time. Check my sheet here. It's the highest it's been since April of last year. So big move in gold. And we're seeing copper kind of decline. It had been up over $4 a pound for the first time since June. Watch copper and gold. Those are things that are going to be big in terms of what's going on in the markets. Look, let's talk about the overall current environment that we're in. The Fed is expected to raise rates. No one's got any question about that. The big question is just by how much. So as we throw up this FOMC, the Fed Funds Rate, right? This is the Fed Funds Rate, what the Fed's doing. We talk about the Fed raising interest rates. We're talking about what's on your screen right now. As you can see, interest rates, the highest they have been at any time in the last 15 years. So we go all the way back to 2013, or I'm sorry. Yeah, we go all the way back to 2013 on this chart to just give you an idea of 10 years. This is well above where we've been at any time in the past decade. And you see the Fed Funds Rate going up there near 4.5% in a range of 4.25% to 4.5%. And we are well above where we've been any time in the past decade. That's important because that has a big effect on the economy. Folks who have started a business in the past 10 years have never seen this environment. Folks who are running business, folks who are making purchasing decisions, who have started in the past 10 years have never seen anything like this. Keep that in mind when you're talking about business and the outlook for the economy moving forward. So just wanted to make sure that you saw that and wanted to put that up there on the screen for you so you're able to look at it. A big thing has been expectations for what the Federal Reserve will do next. We know they've already raised this much. Expectations a month ago had been about 50-50. You saw 51% of investors in the Fed Fund futures market predicting the Fed would raise 50 basis points. You saw about 49% of investors predicting they'd raise by 25 basis points. That has flipped. And now you've got about 91% of investors predicting that the increase is going to be just 25 basis points. And you've got just 9% of investors predicting it's going to be 50 basis points. So after today's CPI report, those numbers moved well in the direction of 25 basis points. Investors strongly predicting the Fed is going to slow down significantly. Remember, we were raising 75 basis points, which is three times as much just a few months ago. Now we slowed down to 50 in December, and now investors are expecting 25 basis point move at the Fed's next meeting, January 31st. And then they'll talk to us on February 1st at the press conference. When we look at the recent data that we've gotten on these reports, the jobs report showed significant lower hourly earnings and slowing hours. That's a trend for inflation to come down. We saw a decline in the employment trend index for the third month in a row, again, suggesting the labor market is cooling. The Fed has really pointed at the labor market and said, too many jobs, too much hiring, too much of this, what normally would be good things is going on in the economy. The New York Fed can survey of consumer expectations, so declining one year inflation expectations to the lowest since July 2021. People think inflation is going to come down. And what we have seen from the JOLTS report, the job opening and labor turnover survey. Now, I want to throw something on the screen here just so you can see exactly what we're talking about. Fed chair Jerome Powell has talked a lot about, well, there's so many job openings. There's two times as many job openings or two job openings for every unemployed person. Look at this chart. You go all the way back to the beginning of this chart, which was 2001, and you see that we had never seen this before, where there was this many more job openings for this many unemployed people. The unemployment rate is very low, but there are lots of job openings, about 10.45 million job openings, according to the last job report, and only about 6 million unemployed people. So, not quite at two to one, but as you see, it's kind of starting to come down there at the end. So, as we've been moving forward, there have been a declining number of job openings, the number of unemployed people has stayed steady, but that unemployment or those job openings have been coming down, and that's what the Federal Reserve wants to see. We're also seeing slowing prices in the employment and recent purchasing managers index. Those are signs that the economy is starting to cool, and worrisome for some folks could be moving towards recession. So, that's the overall environment we've seen. The Fed has said, look, we're willing to withstand a recession if it means getting inflation under control, and that's really what a lot of the data is telling us. We're moving away from this economic expansion, where things are booming, and moving back towards a cooling, perhaps recessionary environment. The Fed is saying they're okay with that. We are going to get a number of Fed speakers today. I want to highlight a few of those that we'll see coming out today. So, we've already heard from Philadelphia Fed President Patrick Harker. He spoke at 8.45 a.m. He said that he supports a move to 25 basis points. That's that much slower or the normal pace of rate hikes. But, Patrick Harker is not a voter. He doesn't actually get a vote. Fed, St. Louis Fed President James Bullard, he is going to talk at 11:30. You'll want to tune in for that. And the Richmond Fed President Thomas Barkin, also not a voter, he speaks at 12:40. James Bullard is a voter. He has a vote on the committee. He has gotten very hawkish, meaning he favors higher rates to quell inflation. His remarks will be very well followed by the market. If you're in the market, if you're an investor, you're going to want to watch what St. Louis Fed President Bollard has to say at 11:30 a.m. All right, listen. Moving forward, we all want to know what comes next, right? What's the next shoe to drop? We will get the University of Michigan Consumer Sentiment Index that is released on Friday, tomorrow. MLK Day, we've got to celebrate the Good Reverend Doctor on Monday. Markets will be closed. You know, do your thing. Go out there. Like I said, do something in honor of the Good Reverend Doctor. Make it a day on, not a day off, as they like to say. Then we get back into it. Wednesday is going to be retail sales and the producer price index, aka wholesale prices, aka what businesses are paying. We will be right here on Market Takes on Wednesday, breaking that down, giving you all the information, everything you need to know. So be there or be a... That's a square. Don't do it. And then we get existing home sales on Friday after that. So we'll be right back here on Market Takes in a little less than a week. We hope that you will be with us. And I know you could be anywhere. I hope you'll be right here with us. That's going to do it for us right now. But thank you so much for being with us. I'm your host, Dion Roboan. This has been Market Takes, and we will see you next time.