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The moment the Consumer Price Index (CPI) was released by the Commerce Department at 7.7% the market cheered. All indexes opened up big and kept going higher. The NASDAQ Composite finished up over 7%, its best "CPI Day" run ever, and one of its largest one-day moves ever.
The praise was everywhere in the mainstream media as they discussed "the slowing pace of inflation." Dallas Fed President Lorie Logan called the report "a welcome relief."
Let 'em squawk. I'm not cheering at all. Momentum has shifted green in the short term, but I'm reading this CPI number and... WOW! Things are off in this report.
The "improvement" the media is gushing about - "down to 7.7%" - is fueled almost entirely by a dip in used car and apparel prices. This means they're clearing inventory, nothing more significant than that.
In fact, used car prices have been falling since July; supply chain problems overheated the market during the pandemic.
Used Honda Accords and last year's athleisure bottoms aside, almost everything else is up, and up big.
Food, energy, and much more. If you can buy it, it's probably more expensive right now - and if you must buy it to live, it's definitely more expensive. Diesel just had its biggest jump in three months (3%) and heating oil is up roughly 20%, year over year.
Food is up 0.6%, gasoline is up 4%, shelter is up 0.8%, and there are the increases I just mentioned. Over the course of the year, it's worse, of course: Food is up over 10%, shelter is up 6.9% and fuel oil is up 68.5%.
Does that sound like great news to you?
No. The media portrayal of slowing inflation is nothing but cheerleading. It's not slowing down in any meaningful way whatsoever.
What the media's not getting, and what isn't actually a secret, is CPI is a compounding report. What it shows is a tiny decline in the rate of increase. Inflation "rose less than expected" (though it's unclear who's really doing the expecting here), and now that we're on the other side of the midterm elections, consequences are muted.
Remember, inflation is compounded. This was a 7.7% increase over 2021. In 2021, there was 6.2% year over 2020.
In plain English, this means you and I have experienced a 14.3% total increase in official inflation over the last two years. That's a big jump.
Of course, today, stocks are making the big jump. But do not, repeat, not buy into these rallies for the long term; don't put all your (increasingly expensive) eggs in this basket. I'm convinced what we're seeing is short covering. A lot of short covering, granted, but that's all it is, same as with any other bear market rally. A lot of the stocks surging as I write this have no profits and have revised earnings downward.
Inflation won't be heading down anytime soon, either. We're so far from the Fed's 2% inflation target as to make this 7.7% "cooldown" meaningless. We're miles from that target, and so, despite what Lorie Logan says, the central bank as a whole is not thinking of easing policy from here. A slower pace of interest rate hikes... are still interest rate hikes. And that's still big trouble for companies carrying an increasingly pricey, risky debt burden.
Don't buy it.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.