July CPI: Many Price Categories Are Still Increasing
For the first time this year, CPI data came in within expectations. Many in the mainstream took this as a sign “transitory” inflation might be cooling. But many prices continue to increase.
The BLS Consumer Price Index (CPI) has become one of the most anticipated data points each month. The CPI has become a controversial measure over the years. Many correctly point out that it is continuously refined to lower the inflation readings using mechanisms like Owners Equivalent Rent and goods substitution. This makes sense from a strategic standpoint as inflation expectations have shown that they can cause inflation to increase. Thus understating inflation can rein in expectations.
Even though the inflation methodology is controversial, this analysis uses the data within the CPI (indexes and weightings) to recalculate the inflation rate from a sub-category level. This allows better insight into what is driving the price changes as the charts below show. For more detail on inflation based on the way it used to be calculated before the modifications, see Shadow Stats.
Note: Inflation by definition is the expansion of the money supply, but for this article, it will refer to rising prices.
The latest seasonally adjusted month-over-month inflation rate was .47%, with a non-seasonally adjusted annual rate of 5.37%. The biggest reason for the fall from June’s .91% pace was a significant drop in Commodities and Transportation.
Specifically, Transportation fell due to a collapse in used car sales from 10.5% in June to 0.2% in July. The fall in Transportation was driven by a few month-over-month factors: Car Rentals from 5.2% to -4.6%, Insurance from 1.2% to -2.8%, and Airline Fares from 2.7% to -0.1%. So, does this prove that inflation was “transitory?’ Most likely not, as shown below.
Figure: 1 Month Over Month Inflation
The year-over-year chart below does highlight the dramatic impact of Commodities and Energy. It is unlikely that used cars will continue moving up and may even revert lower as more supply comes on the market. However, it is also unlikely that Oil will reverse and may actually continue to increase in the months ahead.
Furthermore, as eviction moratoriums inevitably end, rents are going to push higher to compensate landlords for lost rent. Finally, there are major supply issues and port constraints that will not alleviate in the near future, it is likely that the high costs will be passed to consumers in the months ahead.
Figure: 2 Year Over Year Inflation
The plot below compares the recent numbers with the year-over-year monthly average. This chart further highlights that many items are still increasing in price. The blue bar shows the most recent period and the orange bar is the 12-month average. In almost all categories, the blue bar is higher except for the items mentioned above (commodities, specifically used cars, and transportation).
Figure: 3 MoM vs TTM
The table below gives a more detailed breakdown of the numbers. It shows the actual figures reported by the BLS side by side with the recalculated and unrounded numbers. The weighted column shows the contribution each value makes to the aggregated number. Some key takeaways:
- Shelter doubled MoM from .2 to .43. YoY the jump was 2.34 to 2.79.
- This is where Owners Equivalent rent is a farce. This article shows how rents are rising much faster. Eventually, the surveys will pick up on this because obviously, the housing market is rising way faster than 2.79% YoY.
- Food is up MoM from -.3 to +.72. Food does tend to be volatile, so hard to know if these prices will remain.
- YoY food has actually fallen from 4.07% down to 3.44%
- The big MoM drop in transportation can be seen from +2.76% to -1.09%
- Again, this could be due to slowing demand as a result of the Delta variant. YoY the base effect is still having an impact showing Transport up 6.22% vs -3.79%.
- Finally, even though everyone is already claiming this latest report shows June was the peak, a look at the MoM diff tells a different story. Almost half the categories are still increasing in price. It’s very possible this is the start of the earlier price increases making their way into the broader economy.
Figure: 4 Inflation Detail
Validating the Recalculation
Recalculating the BLS number is not a perfect science. The weightings must be scraped from the web pages. The index data is then gathered using an API. Each index comes seasonally adjusted and unadjusted. To validate the recalculation there are three variables shown below:
- The Actual Reported number
- A number calculated using the All Items index that is Unrounded
- A number recalculated using the subcategory levels and doing a weighted average sum
The chart below shows the recalculation is very accurate compared to the reported numbers.
Figure: 5 Recalculation Check
The BLS weightings have only been scraped back to 2012, thus the chart below shows the past 9 years of annual inflation data. The volatility in Energy can be seen clearly over this time period. The base effect in transportation (purple) can also be seen with the decreases in 2020 followed by the increases in 2021. Finally, the impact of used cars on commodities (light blue) can also be seen clearly in the more recent period.
Figure: 6 Historical CPI
The historical weightings show that there is not much change over time across categories. It also shows the massive weighting given to Shelter which is why Owners Equivalent Rent has had such a strong impact on anchoring reported inflation.
Figure: 7 CPI Weighting
What is the Fed looking at?
Finally, the Fed publishes data going back to the 1950s. Unfortunately, they do not publish the weightings of each category so it would be impossible to do a similar analysis showing the impact of each category on the overall number. The Fed categories are slightly different because they do not separate energy into their own category. Regardless, the top line number at the Fed matches the BLS CPI as expected.
Looking at history back to 1950 puts the current spike into perspective. The last time the economy saw a spike similar to the current one was in 2008. Inflation was tempered then by the Global Financial Crisis. What is going to stop the explosion in prices this time? Especially with the Fed continuing to grow its balance sheet and expand the money supply each month.
Figure: 8 Fed CPI
Using the Fed categorical data, the next chart shows the current period versus TTM and trailing twenty years. As can be seen, the blue bars are showing higher readings across multiple categories (Food, Housing, Other, and Recreation). Even if the blue bar continues shrinking for Transportation, the Fed still has to hope all the other categories also prove to be transitory. That is a lot to hope for, because if they are wrong, it will be impossible to fight inflation.
Figure: 9 Current vs History
What it means for Gold and Silver
CPI data has become quite a paradox for Gold and Silver. High readings have been putting downward pressure on prices where lower readings tend to support the price levels. This is because the market still anticipates the Fed to fight inflation. Thus higher readings signal tighter monetary policy and lower Precious Metals prices.
Unfortunately for the Fed, they are painted into a corner and cannot scale back the monetary stimulus without devastating the economy. Perhaps this is why the Fed prefers the PCE over CPI, because PCE usually comes in below the CPI. Regardless, the inflation numbers may impact short-term movements in the price of gold and silver due to speculative flows, but the long-term positive fundamental outlook should not be impacted. The Fed has to keep printing and it will be impossible to contain inflation.
Data Updated: Monthly within first 10 business days
Last Updated: Jul 2021