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What Is CPI Really Telling Us?

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The Labor Department released February’s CPI numbers on Wednesday. The mainstream spin was “no inflation, nothing to see here.” But what will we find if we dig a little deeper into the numbers?

CPI was up 0.4% in February. That follows on the heels of a 0.3% rise in January. The rise was in line with expectations.

In the 12 months through February, the CPI gained 1.7%, still below the Fed’s mythical 2%. But it was the biggest year-over-year increase in 12 months.

According to CNBC, a big spike in gasoline prices had a major impact on February CPI, “but underlying inflation remained tepid.”

So, there you go. Nothing to worry about. There is no inflation, just as Federal Reserve Chairman Jerome Powell keeps telling us.

But WolfStreet broke down the numbers further and found a little cause for concern.

The CPI is calculated by analyzing the price of a “basket of  goods.” The makeup of that basket has a big impact on the final CPI number. According to WolfStreet, 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)

As you can see, services dominate the CPI, accounting for nearly 2/3 of the total.

Why is this important? Because the service sector has been hardest hit by the pandemic. Price increases for services are being held down by what WolfStreet calls “battered discretionary services.” Think movie theaters, airlines, and sports and entertainment.”

CPI for services was only up 1.4% year-on-year. This is still at the lower end of the pandemic range.

  • CPI airline fares: -25.6%
  • CPI hotels, motels, etc.: -17.2%
  • CPI admission to sporting events: -14.1%

It’s no surprise CPI in the service sector remains – to use CNBC’s term – tepid.

But meanwhile, CPI in goods is really spiking.

Nondurable goods CPI was up 1.7% year-on-year. This category collapsed in the early days of the pandemic, primarily driven down by falling gasoline prices. But if you’ve gone to the gas station recently, you know that trend has reversed in a big way. For some reason, pundits tend to dismiss rising gasoline prices when it comes to CPI. But money out of your wallet is money out of your wallet.

Meanwhile,  food prices in February rose 3.6%. This includes prices at restaurants, many of which remain closed.

CPI for durable goods is up even more – 3.3% from a year ago. This remains near the peak of the pandemic price spike that we saw with shortages and production delays. A lot of those problems have eased, but the prices remain high.

In fact, demand for durable goods has remained high during the pandemic despite widespread unemployment. Americans have gone on a stimulus-fueled spending binge. In a nutshell, the Federal Reserve printed money. Uncle Sam handed it out. American consumers spent it on imported goods.

As WolfStreet sums it up, “prices of goods are rising sharply, amid all kinds of shortages of durable goods after stimulus-fed red-hot demand, and food prices are rising too.”

The question is, what’s going to happen when services start to pick back up as well? WolfStreet sums this up as well.

Parts of the services economy have been hard-hit by the shift in spending from services to goods. And those sectors have responded by slashing capacity – and some purveyors of these services shut down for good. When this shift reverses, as people revert to buying airline tickets, staying at hotels, taking cruises, attending sporting and entertainment events, etc., this renewed demand will meet slashed capacity, creating price pressures that will feed into services CPI.”

Despite what the mainstream keeps telling us, and Jerome Powell’s insistence notwithstanding, we are witnessing an erosion of our purchasing power. And that is likely to accelerate in the months ahead.

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