Is There Some Good News About Government Data On Inflation?
There might be...
This is a quick note (about 3 minutes) because I see two different ways to look at this week’s inflation data.
The chart below shows the initial headline of 2.9%, which tells you that inflation is moderating and coming in below market expectations.
It has been interpreted as giving the Federal Reserve permission to cut rates when it meets in September.
This next chart, though, suggests that shelter costs are still high since housing costs make up over 40% of the CPI (consumer price inflation) data.
A Different Point of View
So, maybe the Federal Reserve should remain concerned and leave rates where they are.
That is certainly what the participants in this X-spaces forum thought. Health warning: since this discussion is over two hours long, I don’t recommend clicking unless you have a serious interest in some dense discussion…
The consensus was that the world is awash in liquidity, that employment is strong and improving, and that the outlook for inflation, long-term, is rising.
Their conclusion is that the risk is much greater that the Federal Reserve will make a mistake by cutting rates too soon.
The Better View
For a different way to interpret what this data means, consider these words from the always excellent Lance Roberts in his daily commentary on Real Investment Advice:
Core CPI without shelter prices was negative for the third month in a row. The last time it was negative for three consecutive months was from March through May 2020, when the pandemic had shut down the global economy. The CPI shelter index is up 5.1% over the last year. Furthermore, it accounts for 70% of the total year-over-year core CPI figure. We have harped on shelter prices on many occasions. To summarize, CPI shelter costs, accounting for 40% of CPI, lag significantly from real-time independent market data and the Fed’s New Tenant Rent Index. When, not if, CPI shelter costs catch up to market costs, 40% of CPI will head toward 0%. With it, the Fed may likely be moaning about insufficient inflation or dreaded deflation.Remember, we are not alone in telling this story. The Fed and most economists know that inflation without shelter prices is below the Fed’s target. Moreover, they also understand the flaws in the CPI shelter data.
This interpretation is that the housing data is stale and that housing costs have been falling in the last twelve months, so the headline CPI data really overstates inflation. Cut, cut, cut!
What should you do?
As I said, the long discussion on X-Spaces is dense. It is full of very detailed information about what ought to be.
The market, however, is much more inclined to trade on the sentiment of what the many participants that drive it.
Lance Roberts always believes, as do I, that the most valuable information is not what the market ought to do but what the market is likely to do based on sentiment.
I pay attention to Roberts.