Ding dong, inflation is not dead

The numbers for the Consumer Price Index (CPI) and the Producer Price Index (PPI) are down slightly. However, if you think that inflation is now over, then you have wandered down the wrong lane, in my humble opinion. Some of our politicians are touting this, but I am telling you that they are living in some sort of fantasyland or touting this argument for purely political reasons.

Virtually all of the decline in the CPI Index was due to the decline in oil, natural gas, and gasoline prices. On a monthly basis, energy prices declined 4.6% and gasoline fell 7.7%, according to the Bureau of Labor Statistics. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs. There is now the thought that the Fed will not increase its rates by 75 basis points in the next go round, but by a lesser number. I wouldn’t bet on this outcome.

In fact, the jump in the food index put the 12-month increase to 10.9%, the fastest pace since May 1979. Butter is up 26.4% over the past year, eggs have surged 38% and coffee is up more than 20%. Despite the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago. The energy index is still up 32.9% from a year ago.

“The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target, I just think it’s unrealistic,” Minneapolis Fed president Neel Kashkari said.

He further stated that, “I think a much more likely scenario is we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates.” He went on to state that the Fed “is far away from declaring victory on inflation, and while this is the first hint that price movements are moving in the right direction, it doesn’t change my path for rates.”

There you have it.

Our moving line in the sand has shifted, but it is still a significant number. I view the average of the CPI Index and our PPI Index as the line in the sand, and it now stands at 9.15%. In my view, either through appreciation or income, you are either earning more or less than this number, and this determines if you are winning or losing in the Great Game.

What is particularly interesting is that after the release of the two index numbers, the bond and stock markets are moving in opposite directions. Equities are up, while bond prices are down as the two markets disagree on what the Fed might do next. Our markets, in my opinion, continue to be flummoxed, and there seems to be no end in sight. Neither of these markets, of course, comes nowhere close to matching even our current inflation numbers as the red ink continues to plow on unmercifully.

Even with the recent rise in equities, the DJIA is still down -7.82% for the year, with the S&P 500 -11.20%, and the NASDAQ -17.73%, according to Bloomberg data. The picture is better, but still not pretty yet. Also, in fixed income, with a few exceptions, the yield in bonds is nowhere our inflation numbers either.

Then, on top of this, you pile on the increased borrowing costs from the Fed raising rates, and the economy is having a tough time of it. You can say recession or no recession, but the American economy is still going through a difficult time, no matter your take on an actual recession.

Two hundred and twenty-five basis points of rate hikes this year, and the promise of more to come as the Fed battles to bring inflation somewhere in the close to its 2% target, which has lifted the Treasury two-year yield approximately 36 bps above the Treasury 10-year yield. The bond market is signaling more trouble ahead, in my viewpoint, and I am paying attention, as I suggest that you do as well.

The yield curve is inverted for a reason.

Original Source: Author

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