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CPI: History Suggests the Inflation Fight Might Just be Starting

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Before digging into history, let’s look at the recent data. The latest seasonally adjusted inflation rate for November came in at 0.08%. The YoY rate was 7.17%, below median forecast of 7.3%.

As shown below, the relief is mainly coming from Energy and Commodities even while the cost of Shelter and Food continue to rise. This means the relief is coming from more volatile items where the stickier items are showing continued strength in inflation.

Figure: 1 Month Over Month Inflation

The irresponsible use of the Strategic Petroleum Reserve (SPR) has definitely helped offset the earlier rise in Energy prices and helped some. The current reserve is now at 387M barrels, down 40% since Biden took office. Assuming an average sale price of $85 a barrel, the total amount released has been about $21B!

Figure: 2 SPR Inventory

When looking at the YoY numbers, it’s clear to see that much of the draw down over the last few months has come from Energy and Commodities while other categories, specifically Shelter, are still rising.

Figure: 3 Year Over Year Inflation

The chart below compares the current month to the 12-month average. Shelter, Recreation, Education, and Other are all still rising relative to the trailing twelve-month (TTM) average. This means that almost half (42.5%) of the CPI is still accelerating when compared to the last year.

Figure: 4 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. Details can be found on the BLS Website.

Some key takeaways:

    • The fall in Commodities was driven by another big drop in Used Cars/Trucks of 2.9% after seeing a drop of 2.4% last month
    • The drop in Energy was highlighted by a 2% fall in Gasoline
    • Education and Communication Services were driven primarily by Wireless phone rates increasing 2.4% MoM
    • Shelter has now risen 7.1% YoY which is finally getting closer to market rates around 9%.
        • 9% is down from 12-14% over the last year showing the true CPI understatement

Figure: 5 Inflation Detail

Looking at the Fed Numbers

While the Fed does have different categories, its aggregate numbers match to the BLS.

In this view, only Recreation is above the 12-month trend. That said, most of the categories are well in excess of the 20-year trends. If Apparel and Medical Care are one-off falls then inflation could very likely tick back up next month.

Figure: 6 Current vs History

Fed Historical Perspective

The Fed data goes 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.

Looking at history back to 1950 puts the current spike into perspective. According to the Taylor Rule, the current Fed Funds rate should be above the rate of inflation. This has been necessary in the past to bring inflation back down. Thus, despite the big interest rate hikes, the Fed is still not doing enough to combat inflation.

The chart below highlights another important fact. Every spike in inflation historically was typically a spike that quickly reversed. However, after the reversal, inflation then turned back up again, oftentimes even higher than before.

As the Fed would lower interest rates back down with falling inflation, the CPI would respond by going back up. It was not until Volker held rates above the inflation rate for an entire decade that the rate started to come back down. The current Fed does not have a decade to keep rates high. It’s probable they don’t even have 18 months before something catastrophic happens. The Federal Budget definitely doesn’t have that much time.

Figure: 7 Fed CPI

BLS Historical Perspective

The BLS weightings have only been scraped back to 2012, thus the chart below shows the past 10 years of annual inflation data, reported monthly. It cannot show the spikes in the ’70s and ’80s that is shown in the Fed data above.

As mentioned, although the spike has reversed somewhat, it will take a lot more work to get the CPI readings back below 2%. However, as mentioned above, it is likely that peak inflation is still in the future as the CPI rips higher following a pre-mature Fed pivot.

Figure: 8 Historical CPI

What it means for Gold and Silver

Gold and silver continue to trade inversely to the CPI as the market anticipates the Fed being able to ease up on interest rate hikes. However, as mentioned above, many times a spike in inflation is seen followed by a swift move down and then an even bigger move back up. This is what the market is not yet seeing.

When the Fed is forced to pivot because of the economy, inflation is going to return but the Fed will be unable to even weakly fight it in the next round. Once this reality dawns, the precious metals will take off and the dollar will tank even faster than it has over the last month.

Data Source: https://www.bls.gov/cpi/ and https://fred.stlouisfed.org/series/CPIAUCSL

Data Updated: Monthly within first 10 business days

Last Updated: Nov 2022

Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/

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