September CPI Is 3.7%

Overview

Today, we got the September Consumer Price Index (CPI) report which showed an overall increase of 3.7% in the last year and .4% vs last month. This was above expectations of 3.6% for the year and .3% for the month. The Core CPI which excludes food and energy was up 4.1% for the last year and up .3% from last month. Those were both in line with expectations, and the annual number is still more than double the Fed’s 2.0% target. Let’s go through the details:

CPI holding at higher levels. The Fed still needs to cut the red line in half.

Real interest rate (fed funds - CPI) holding at 1.6%.

Food

Food inflation came in at 3.7%. Food at home was up 2.4%, and I continue to insist that anyone who believes that number hasn’t been inside a grocery store in years. Food away from home was up 6.0%. That’s not great. I saw a report yesterday that some restaurants are now allowing buy now / pay later purchases because their diners can’t afford to pay for their meals when they go out to eat. This is both a sign of a very stretched and unwise consumer. It’s also a sign of bad credit-management by the credit card companies. Eating out is enjoyable, but also much more expensive than dining at home. I can understand financing a car or even some home furniture. Buying a restaurant meal on layaway strikes me as a bad idea with substantial future credit losses on the way.

Energy

Energy continues to be the primary reason the CPI has come down so much this year. It’s not that energy prices are cheap; but rather, that those prices are being compared with last year’s spikes. Total energy prices were down .5% with gasoline up 2.2% and fuel oil down 5.1%. These prices were down substantially more in recent months.

Again, we point to the White House’s decision for the second year in a row to roll into hurricane season with the strategic petroleum reserve (SPR) at 40-year lows. Tired of the White House delays in replenishing the SPR, the Saudis have extended production cuts of 1MM barrels a day into September. Russia is now also joining in and adding to OPEC production cuts. Both countries have said they’ll continue these production cuts for the coming months and the White House is facing price spikes every time they try to refill a small part of the SPR. (I left this paragraph unchanged because the White House is having difficulty refilling the SPR and the production cuts have been extended.)

This is further complicated by last weekend’s attack by Hamas on Israel. Anytime there is war in the Middle East, energy prices tend to rise. There may be an increase in sanctions on Iranian oil coming. In addition, a Finish pipeline was sabotaged, and Russia is having difficulty refining some of its own crude and has to export it. That will lead to lower crude prices due to more supply, but higher refining costs due to less capacity. Overall, expect high energy prices to continue and for the comparisons with the prior year to get easier.

Vehicles

New vehicle pricing was up 2.5% and used vehicle pricing was down 8.0%. These have been volatile categories. We’d also note that the decrease in used car pricing is off of a huge increase. I’m also reading reports of skyrocketing numbers of auto loans going delinquent which will lead to more supply of used cars and lower prices in the future. The now-common $1,000 monthly auto payments aren’t an option for most. There’s clear improvement in pricing for now, but prices are still well above the pre-pandemic levels:

Still expensive but improving.

Services

Services prices were up 5.7%; a slightly smaller increase than last month, and still very high. This category is an issue for the Fed because much of the increase is caused by higher wages. Labor is still in demand with unfilled jobs now climbing towards the 10MM mark again. The Fed is actively trying to restrict wage growth and raise the unemployment rate to take pressure off of this part of the CPI. While gross domestic income (GDI) is starting to indicate a recession, the overall employment market remains strong. We also note that the services CPI is artificially low right now due to a huge adjustment to health insurance pricing. Medical care services pricing was down 2.6% which is clearly an artifact of this adjustment rather than a decrease in costs that people are paying for their insurance. This adjustment has now expired and will not be an issue going forward.

Shelter (a fancy word for housing) costs were up 7.2% and represents the largest category of the CPI. Most of today’s 3.7% CPI increase is due to this category alone. We’ve commented on housing dozens of times in the past year, and have been surprised at the resilience of the market. While commercial property prices are declining in many places, housing has remained strong. There has been talk of an AirBnb housing bust, and while that’s likely to happen, these potential sales haven’t crashed the market yet, or been as large as many expected (as of now).

This data is reported on a multi-month lag, and housing hasn’t gotten more affordable since the last update.

Analysis

The market was excited by disinflation. That’s a reduction in the rate of change of the CPI. It means that while prices are still increasing, they’re doing so at a slower rate. That’s great for Wall Street analysts and those who fondly remember their high school calculus. If you’re working and trying to make ends meet, it looks like this:

This is the disinflation that finance people are discussing. Most consumers just see higher prices.

Without the massive y/y price decreases in energy, and with a continually strong housing market, the Fed (and US consumers) are now facing an increase in the rate of inflation. While there are many complaints of “historic” Fed rate increases, the core number remains both sticky and high.

Conclusion

Despite many people complaining about draconian Fed rate hikes, the CPI is still high, services inflation is still very high, and energy prices have stopped plummeting. The stock market is assuming the Fed won’t raise rates again this year. DKI’s view is the next decision could go either way at the next meeting. The US has persistent too-high inflation and a very strong labor market. There are also inconsistent signs of economic weakness and the consumer starting to run into trouble while continuing to spend. The US is likely to be funding two wars now in addition to massive domestic overspending. This means that as higher long-term interest rates help the Fed slow the economy and reduce inflation, Congress is pulling in the other direction with trillions of dollars of additional debt-funded inflation-creating spending.

GB@DeepKnowledgeInvesting.com if you have any questions.

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