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Expectations Are Finally High Enough for Sky High Inflation

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The latest seasonally adjusted inflation rate for November was .76% month over month, with a non-seasonally adjusted annual rate of 6.81%.

These numbers were generally in line with mainstream expectations that have finally gotten high enough to match the blistering hot inflation numbers coming out month after month.

Remember in June when the Fed expected 2021 inflation to come in below 4%? December has not officially printed yet, but it’s safe to say the Fed was very wrong.

The Fed also said that inflation expectations were their biggest concern. They wanted to ensure that inflation expectations were well anchored. Unfortunately, it appears inflation expectations have finally risen to match the price increases seen in the CPI. Additionally, the price increases are not concentrated in select goods as they were earlier in the year.

As the chart below shows, the main drivers were across the board again. The highest weighted categories are all moving up significantly: energy, food, shelter, and commodities.

Figure: 1 Month Over Month Inflation

The year-over-year chart below shows how commodities (goods) and energy have really been driving the numbers this year (responsible for 3.91% of the 6.76%). Shelter is starting to contribute as well, responsible for 1.28% of the YoY move compared to .64% in November 2020.

Figure: 2 Year Over Year Inflation

The chart below compares the recent numbers with the year-over-year monthly average. The only category in negative territory is Recreation which was primarily driven by a fall in three categories: “Cable and satellite TV Services” (-.2%), “Video discs and other media, including rental of video” (-1.8%), and “Admission to sporting events” (-4.8%). At a total category weighting of 3.7%, these price falls are doing little to offset the other moves.

Shelter is another category that has been heating up lately. As discussed previously, there is no doubt that housing costs are grossly understated in the CPI. But even the heavily doctored CPI is showing an annualized increase of 6.17% in Shelter. Although this is still probably half the actual rate, this will keep inflation numbers elevated in the months ahead even if Energy prices continue to pull back due to Omicron.

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. Details can be found on the BLS Website. Some key takeaways:

  • Shelter clocked in at .5% MoM (again) and 3.88% YoY
    • Most private market estimates have this number closer to 10% YoY
    • Specifically, Owners Equivalent Rent is up 0.4% MoM and 3.5% YoY
  • Energy continues higher up 33.5% YoY adding a full 2% to the weighted average total
    • Once again, all forms of Energy are up big except for Electricity (only up 0.3% MoM)
  • The 0.9% MoM move in Commodities was driven by Household Supplies (.7%), Apparel (1.3%), Vehicles (1.7%)
  • Food was up 0.7% MoM and 6.1% YoY
    • Food at Home all showed large price gains across Grains, Meats, Fruits, and Veggies
    • Eggs actually saw a price drop of -2.7% MoM

Figure: 4 Inflation Detail

In short, the CPI numbers are showing widespread increases across many categories. It’s impossible to ignore, which is why the Fed was finally forced to retire the “transitory” word.

With the Fed meeting next week, they will have to decide what actions to take. This will get complicated in the face of a dismal jobs report and a debt landscape that has changed dramatically from even 3 years ago.

Looking at the Fed Numbers

While the Fed does have different categories, their numbers match the BLS.

In fact, their 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. The current spike is much larger than the one seen pre-2008 and more closely resembles the move in 1972 when prices went from 3% to 11% in under two years. That inflation proved “transitory”, falling back to 5% in 1976 before reaching 14.6% in 1980.

Back then, inflation fell because Paul Volker raised interest rates to 20%. This time though, even a 5% rate increase would absolutely devastate the federal budget, crush the housing market, and obliterate the stock market. So, what can the Fed do other than just watch the numbers and hope?

Figure: 5 Fed CPI

Using the Fed categorical data, which is different than the BLS, 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 most categories.

Some categories have fallen back in line with historic averages, but again the heaviest categories are all well above average. If producers finally pass on their cost increases to their customers, then it’s quite possible all categories will be well above historic averages in 2022.

Figure: 6 Current vs History

Historical Perspective

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. Regardless, putting the historical data together provides a good perspective on the current period.

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 recent impact of Commodities (goods, not energy) can be seen in the chart clearly.

Nothing about this chart could make someone believe the problem will fix itself, especially with the Biden administration pushing for more spending. In order to bring this chart back down, the Fed would have to get very aggressive or the economy would need to experience a major deflationary event. But we also know how the government would respond (massive money printing).

Figure: 7 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: 8 CPI Weighting

What it means for Gold and Silver

CPI data has become quite a paradox for gold and silver. High readings have put downward pressure on prices whereas low readings tend to support the price levels. This pattern reversed in November where weak jobs and high CPI actually pushed gold prices to multi-month highs. Unfortunately, this was a short-term head fake and prices fell back through $1800 on a Powell renomination and a more “hawkish” overall Fed. This month, gold has been surprisingly stable in the face of jobs and inflation data.

Gold has certainly found a solid floor at $1750 but is also showing no appetite for going above $1800. The market may already have priced in the Fed meeting next week which could keep prices range-bound for now. The next repricing will occur when the market realized the Fed is completely bluffing. However, this still seems a way off based on the current market action.

Regardless of short-term moves, the groundwork has been laid for decades. Excessive spending and money printing by the government and Fed will result in higher prices for the foreseeable future. Astute investors should look past the short-term fluctuations and recognize the Fed can do nothing about high inflation. Protect yourself accordingly.

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 2021

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

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