March CPI Is 3.2%

Today, we got the March Consumer Price Index (CPI) report which showed an overall increase  of 3.5% unadjusted in the last year and 0.4% vs last month. That’s above last month’s 3.2% and  expectations of 3.4%. The 0.4% monthly increase annualizes to 4.9%. The Core CPI which  excludes food and energy was up 3.8% for the last year and up .4% from last month. The annual number was above expectations of 3.7%, and flat vs last month. The annual number is still almost double the Fed’s 2.0% target. Let’s go through the details: 

This is not the disinflation story many have been celebrating in recent months.

I still don’t think current Fed policy is as restrictive as some believe. The real rate is back below 2%. 

Food: 

Food inflation came in at 2.2% which was a significant decrease from last month’s 3.2%. Food at home was up 1.2% which was below last month’s 2.2%. I write this every month, but I  continue to insist that anyone who believes that food inflation is only 2% hasn’t been inside a  grocery store in years. Food away from home is now up 4.2% which is slightly better than last  month’s 4.5%. 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. 

Last weekend, I saw some interesting analysis on Twitter/X where someone tracked the price  of the 50 most commonly-bought items at supermarkets. They determined that this basket was  up 8% annually for the past three years. I believe this number is much closer to the truth than  the CPI. It explains why so many people are angry about inflation and refuse to celebrate the great economy narrative being pushed by many in the media. When your grocery bill is up  almost 30% in three years, that’s going to create stress for most households. 

The reason I keep reprinting the same language about understated food inflation is because  the BLS keeps printing the same nonsense. 

Energy: 

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 2.1% with gasoline up  1.3% and fuel oil down 3.7%. These items had seen 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. 

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. 

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.

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/.  

Vehicles: 

New vehicle pricing was down 0.1% and used vehicle pricing was down 2.2%. 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 about half of the Covid-related spike in  used car prices has disappeared. Pricing is slowly 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. 

We’re seeing continued reports of used vehicle loans going delinquent. New car pricing is still  high enough that $1,000/month auto payments are far too common for stretched consumers.  It’s likely that this part of the CPI will continue to decline in upcoming months.

Still expensive but with meaningful and continued improvement.

Services: 

Services prices were up 5.4% increasing from last month’s already-high 5.2%. This is an area  where the Fed is struggling to bring down inflation. This is partly because much of the increase  is caused by higher wages. The labor picture is difficult to analyze right now because the data  being provided is inaccurate. Wages are up and the jobs reports show increases in employment.  

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. 

There are credible reports as well that the recent jobs reports have overstated employment by  almost 1MM jobs. The headline numbers distort (or misrepresent) reality which is going to  create a problem for the Federal Reserve. They will remain “data driven”, but what will that  mean when the “data” is showing a better economy and better employment numbers than  Americans are experiencing? 

Shelter (a fancy word for housing) costs were up 5.7% and represents the largest category of  the CPI. Much of today’s CPI increase is due to this category alone. Housing has remained strong  as people are reluctant to sell their homes and move when higher mortgage rates mean a new  smaller home might have higher monthly payments. This has kept supply off the market and  prices high. 

Mortgage rates have declined off the peak, but not enough to encourage meaningful increases  in supply. In the past, I’ve added the obvious caveat that the decision to market a house and  the sale process takes months so it will be a while before we see the impact of lower mortgage rates. While true, the housing market has remained expensive much longer than most people  expected (including me). 

Technically down from the high, but not a cause for celebration. Housing is around all-time  highs despite/because of lower mortgage rates. 

Analysis: 

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 three  (.75%) with a 50/50 probability of the first cut coming in June. Again, DKI said those predictions  were too optimistic. Within minutes of today’s higher-than-expected CPI report, the market  erased predictions for the first rate cut coming in June and pushed that back to September. 

While Fed Chairman, Jerome Powell, has on occasion indicated a willingness to consider cutting  rates before inflation comes down to 2%, other Fed Governors have been more hawkish and  talked openly about not cutting the fed funds rate at all this year. Barring a massive market  crash, bank failures, or economic downturn in the next few weeks, it’s now clear to everyone that there will be no rate cut at the June meeting. 

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. 

Washington DC has tried to get people focused on disinflation (a reduction in the rate of inflation). This chart is why most Americans are experiencing more financial distress. 

Conclusion: 

The Fed had been succeeding in lowering the rate of inflation, but 0.4% for the month  annualizes to almost 5%. That’s not great and means it’s almost certain the Fed won’t reduce  the fed funds rate at the next meeting. 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 based on recent high inflation data. We’ll see “higher for longer” unless Powell decides to panic and follow the lead of former Chairman, Burns, who authored the high inflation  of the 1970s by reducing the fed funds rate too early. 

One other point of interest: At the market open this morning, Bitcoin, gold, and silver were all  trading down after their recent huge increases in price. I believe the reason for the reduction  in price is the market is starting to understand the Fed isn’t going to cut interest rates soon. Higher yields on the US dollar makes it more attractive relative to zero yield instruments like Bitcoin or precious metals.  

DKI notes that this is true in the short-term. However, if the reason for higher rates is high  inflation/currency debasement, then that makes the long-term prospects for alternatives like Bitcoin, gold, and silver much better. If the dollar loses purchasing power each year, and harder  currency alternatives maintain purchasing power, then the dollar price of those alternatives  will increase. Even as I was in the process of writing this piece, silver and gold went from down  on the day to up, and Bitcoin has recovered most of its morning drop. I don’t think the hourly  chart of these instruments is predictive, but it is interesting to watch during high-impact events  like the monthly CPI announcement. 

IR@DeepKnowledgeInvesting.com if you have any questions. 

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. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions  of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell  positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult  with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has  engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind,  including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use  of this report.