Food inflation came in at 2.2% which was the same as last month. Food at home was up 1.1% which was below last month’s 1.2%. I write this every month, but I continue to insist that  anyone who believes that grocery prices are up only 1% hasn’t been inside a supermarket in  years. Food away from home is now up 4.1% roughly the same as last month. Anyone who’s  seen the recent posts about bills of more than $20 for a burger, fries, and soft drink at fast food  places won’t believe this number either. I write this every month, but I continue to be skeptical  of this part of the CPI, and have been for the past two years. It seems understated to me. 

Energy has been the reason the CPI has come down so much in recent months (disinflation not deflation). That trend was never going to be sustainable especially given the desire of many  western governments to limit hydrocarbon production. Energy prices have now reversed and are rising again. Geopolitical conflict combined with extended production cuts by Saudi Arabia  and Russia have contributed to this trend. Total energy prices were up 2.6% (vs 2.1% last  month) with gasoline up 1.2% and fuel oil down 0.8%. These items had seen prior big decreases  moderate to small decreases in recent months. Partly due to the production cuts referenced  above, we’ve gone from energy being a tailwind for a lower CPI to a shift to a headwind. (This paragraph was largely unchanged from last month because the data has shifted from declines  to increases and the absolute numbers are very similar right now.) 

In previous editions of this report, we’ve highlighted the White House strategy of draining the  Strategic Petroleum Reserve (SPR) to get fuel prices down ahead of elections. With a  contentious Presidential election on the way and a White House desperate to convince  Americans the economy is in good shape, DKI doesn’t expect any meaningful replenishment of  the SPR. In fact, there are credible rumors that the Administration is considering selling down  the SPR ahead of this fall’s election. That’s a dangerous strategy as it sells off a strategic  resource just ahead of the fall hurricane season. We’ll all be hoping for good weather in the  gulf this September and October.

Offsetting some of the new trend towards higher energy prices has been the success of the work from home/anywhere movement. Many workers are resisting the call to return to the  office five days a week, and are reducing commuter miles. This is also pressuring commercial  real estate, and the banks that lend to commercial property owners, a trend DKI has been  highlighting in recent editions of the weekly 5 Things to Know in Investing. This issue has been  so important that we’ve been highlighting it for the past few months in both the written and  video versions. 

DKI hosted a webinar earlier this year with energy expert, Tracy Shuchart @chigrl, to discuss oil  and gas, uranium, and geopolitics. For those of you who want to understand this important part  of the economy better, please feel free to check out the full video here (not paywalled):  https://deepknowledgeinvesting.com/tracy-shuchart-and-gary-brode-on-energy/. Tracy predicted that oil would be range-bound with a relatively wide range, and so far, that prediction  has been accurate. 

New vehicle pricing was down 0.4% and used vehicle pricing was down 6.9%. These have been  volatile categories. We’d also note that the decrease in used car pricing is off of a huge increase. Still, if you look at the chart below, you can see that after the enormous Covid-related run-up  in used car prices, recent decreases have made a meaningful dent in those non-temporary price  increases. Pricing is returning towards the “normal” trend. It will be interesting to see the effect  of more manufacturers slowing the emphasis on money-losing electric vehicles and returning  their focus on profitable internal combustion cars and trucks. The White House is now looking  at massive tariff increases on Chinese EV imports. While that’s not a big percentage of the  market right now, we’ll be watching to see how the higher prices and reduced competition  affects the future domestic market. 

However, all of the new jobs are part-time and almost all job growth is coming from  government and health care which is largely funded by government. That’s telling you the  public market is throwing money into the economy while private businesses aren’t doing as well. Finally, these figures are constantly revised downwards. We keep seeing positive initial  reports while the historical numbers get adjusted by so much that the current month “beat”  isn’t enough to show actual growth. Recent employment data was weaker, but given the  inaccuracies and inconsistencies in multiple data sets, and the constant huge revisions, it’s  difficult to get a real handle on the labor market. As we’ve said before, there’s been no growth  in full-time employment in years. That means the growth in jobs has been people taking on  second and third part-time jobs. More people aren’t working. The same people are working  more to make ends meet. 

In the fourth quarter of 2023, the market expected six rate cuts for a total of 1.5% with the first  cut coming in January or March. DKI disagreed strongly and said we’d get fewer cuts coming  much later. In recent weeks, market expectations had been reduced from six cuts to just one  or two with the expectation that the first one would come in the fourth quarter. Some Fed  Governors have been talking about raising rates again, but we doubt the Fed will want to incur  accusations of partisan activity by changing the fed funds rate so close to the November  elections. 

The press release from the most recent Fed meeting was slightly more hawkish in its language  than the prior one, but also included a dovish tapering of quantitative tightening. Powell has  been deliberately inconsistent in his guidance at times telling people that rates are already  restrictive (meaning a cut could be coming) and at others, telling people that the Committee is  firmly committed to getting inflation down to the 2% target (meaning they’re not cutting any  time soon). Other Fed Governors have been much more hawkish in front of cameras in recent  weeks.

For those of you who are inclined towards political analysis, we remind you that changes in the  fed funds rate act on a lag. That means that a potential September cut won’t be soon enough  for the stimulative effect to be felt in the economy before the November election. The White  House was hoping for help from the Fed. Instead, they’re going to get that help from a Congress  that stimulates the economy through overspending and a Treasury Department that’s  monetizing that extra debt. As has been the case for years, we’re all going to be paying for our  “stimmies”, government benefits, and other programs through future inflation. Powell knows  this even though he’s an experienced enough political operator to avoid saying so in public. 

DKI has been saying for more than a year that Congressional overspending and monetization of  that new debt will lead to a second round of inflation and future Fed rate hikes. Expectations  of a rate cut have been pushed back to September/November based on recent high inflation  data and today’s print of 0.3% monthly inflation vs the expected 0.4% will lead to expectations  of more rate decreases coming sooner. I think we’ll continue to see “higher for longer” unless 

The large increase in the price of Bitcoin this year combined with record prices for gold and  rising commodity prices indicates most of the world is expecting more inflation. A risk factor  that’s starting to get more attention is the Bank of Japan. The BoJ owns a massive position in  US Treasuries and has already tried to intervene in the market by selling some of them to  defend the yen. An unwind of the carry trade can lead to higher yields here in the US and higher  borrowing costs which would then necessitate more money printing followed by higher US  inflation. The VIX isn’t recognizing that risk yet, but more market commentators are beginning  to pay attention to this important issue. DKI began speaking and writing about the issues with  the BoJ and the yen in October of 2022. 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it  believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no  representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained  from its use. The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar  information in the future except to the extent it may be required to do so.