Wall Street’s got new happy days. A low 3.2% 12-month CPI rate with a perfect October rate of 0%! Clearly, high inflation is defeated, and the Fed will begin decreasing interest rates soon. So, time to buy stocks again.
If only it were that simple. Instead, “real” inflation continues at about 5%, and that reality undermines Wall Street’s glowing outlook. Here’s the analysis that reveals the reality…
An old saying provides guidance
It’s humorous, but accurate:
- The data you have is not the data you want
- The data you want is not the data you need
- The data you need, you can’t get
So, what’s the data we cannot get?
Overly simplistic media reports with cherry-picked interesting but irrelevant and misleading data because extreme price moves are driven mainly by unusual demand/supply factors.
Examples are gasoline, eggs and airline fares. All were used as proof of high inflation when their prices jumped for extraordinary reasons. Now, all have been readjusting, creating price drops. They are dampening the overall inflation numbers, but the media is now uninterested. Here are the comparisons..
October 2022 12-month price increases:
- Gasoline +17.5%; Eggs +43.0%; Airline fares +42.9%
October 2023 12-month price declines:
- Gasoline -5.3%; Eggs -22.2%; Airline fares -13.2%
… proper analysis and explanation of the latest inflation developments. Unfortunately, the media no longer offer the in-depth reporting by knowledgeable reporters that existed in the pre-internet years. Therefore, we need to do the work ourselves. The place to start is with the BLS (Bureau of Labor Statistics) information that is readily available online. The primary reports are the following (the links are to the latest October 2023 tables):
- Table 1. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by expenditure category (3 pages)
- Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by detailed expenditure category (14 pages)
- Table 3. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, special aggregate indexes (3 pages)
- Note: Prior monthly tables are available at the webpage, Consumer Price Index Archived News Releases
The fiat money inflation rate is the destructive devaluation of a currency, dubbed the “loss of purchasing power.” (“Fiat money” is currency that is not convertible into a valuable commodity, like gold or silver.)
Note: The inflation rate is the increase in prices. The loss of purchasing power is the reciprocal: The decrease in a currency’s value. Mathematically, that decrease is calculated by dividing 1 + inflation rate into the number 1. For example, a 5% inflation rate produces a decrease of about 4.5% (1 / 1.05 = .9545… = a value loss of 0.0454… = -4.5%)
Unlike the prices for specific goods and services, once fiat money inflation occurs, the loss is locked in forever. (The only way to recoup lost currency value is through deflation. That’s not going to happen because “everyone” believes deflation creates a depression.) Therefore, just to stay even, people, businesses, organizations and governments must increase their revenues/income. Naturally, not everyone can do that, and so they see inflation eat away at their well-being. Additionally, inflation creates expanding inequities, particularly between the employed and retired/unemployed, and between the various classes.
Therefore, fiat money inflation is what the Federal Reserve must control. It has chosen 2% as its goal, fearing that anything lower could drift into deflation. That is a debatable rationale – any other number below 2% would be viable – even 0% (i.e., where the U.S. dollar maintains its value). Moreover, deflation in recessions (the time inflation weakens), is understandable and acts as an incentive to “buy now” rather than wait until the times brighten and the price bargains disappear.
The problem: There is no fiat money inflation measure available
Therefore, we must back into the rate. There is no one combination of price data that provides the answer. Unusual demand and supply conditions can cause price shifts in most areas. However, we can examine areas where pricing primarily reflects the general price level. This is where Tables 1 and 2 are especially important.
Below are the areas I have been tracking. They include everyday products and services where brands allow companies to have a good amount of price control, albeit in a competitive environment, and where skilled labor provides services. The list leaves out prices primarily from commodity markets (e.g., fresh fruits and vegetables), big ticket items (e.g., vehicles), volatile pricing areas (e.g., gasoline and air fares), and regulated businesses (e.g., utilities). The rates shown are for the 12-months through October 2023:
Note: Because some businesses were quicker at raising prices or were playing catchup after the Covid shutdowns, the current 12-month rates may be lower than the previous ones. Therefore, I added the 12-month the October 2022 12-month numbers in parentheses.
From “Food at home”
- Cereals and bakery products: Oct. 2023 12-months = +4.2% (Oct. 2022 12-months = +15.9%)
- Processed fruits and vegetables +4.8% (+15.9%)
- Nonalcoholic beverages and beverage materials +3.3% (+12.7%)
- Other food at home (all are processed) +3.6% (+15.4%)
From “Food away from home”
- Full-service meals and snacks (think sit down restaurants) +4.3% (+9.0%)
- Limited-service meals and snacks (think fast food) +6.2% (+7.1%)
From “Household furnishings and supplies”
- Tools, hardware, outdoor equipment and supplies +4.2% (+10.1%)
- Housekeeping supplies + 4.3% (+11.9%)
From “Medical care commodities”
- Nonprescription drugs (less affected by insurance) +8.1% (+4.9%)
From “Pets and pet products”
- Pet food +6.5% (+15.0%)
From “Alcoholic beverages”
- Alcoholic beverages at home +2.7% (+3.8%)
- Alcoholic beverages away from home +5.3% (+7.0%)
From “Other goods”
- Tobacco and smoking products +7.2% (+6.6%)
- Personal care products +5.1% (+6.8%)
From “Services less energy services” —
From “Shelter”
“Rent” is used for both rentals and owned homes. It accounts for over 1/3 of the CPI (all items). So, here are the numbers, but I don’t believe they reflect only fiat money inflation
– Rent of primary residence +7.2% (+7.5%)
– Owners’ equivalent rent of primary residence +6.8% (+6.9%)
- Water and sewer and trash collection services +5.3% (+4.8%)
- Household operations [services] +6.7% (+6.6%)
From “Medical care services” (Areas less affected by insurance)
- Dental services +4.9% (+5.4%)
- Nursing homes and adult day services +5.4% (+4.2%)
- Care of invalids and elderly at home +6.9% (+3.7%)
From “Transportation services”
- Motor vehicle maintenance and servicing +6.3% (+8.0%)
From “Recreation services”
- Cable, satellite, and live streaming television service +5.5% (+3.0% – excluded streaming)
- Subscription and rental of video and video games +4.6% (+5.2%)
From “Pet services including veterinary”
- Veterinarian services +8.1% (+11.1%)
From “Other recreation services”
- Admissions to movies, theaters, and concerts +4.5% (+6.5%)
From “Education and communication services”
- Elementary and high school tuition and fees +5.1% (+3.5%)
- Day care and preschool +4.8% (+4.9%)
- Delivery services +6.0% (+13.9%)
- Internet services and electronic information providers +4.4% (+0.5%)
From “Other personal services”
- Haircuts and other personal care services +5.0% (+5.6%)
From “Miscellaneous personal services”
- Funeral expenses +4.7% (+4.5%)
- Laundry and dry-cleaning services +6.2% (+7.2%)
- Apparel services other than laundry and dry cleaning +5.8% (+14.1%)
- Financial services +5.8% (+5.3%)
The bottom line – Fiat money inflation is still about 5%
Previously, when the CPI rates were high, I explained why 5% appeared to be the underlying fiat money inflation rate. Importantly, that meant the Fed needed to raise quickly the still near-0% short-term interest rate to more than 5% to produce a true tightening that could dampen the inflation rate.
Additionally, they needed to rapidly reverse the 2020 $trillions of money creation they caused. Nothing sparks inflation more than scads of newly created currency. But their reduction has been at a snail’s pace.
So, finally, the interest rate is slightly above 5%. However, the Fed is ready to call it quits, saying they won. Wall Street is even thinking the rate might start going down.
… May 19, 2021
… July 16, 2022
… July 15, 2023