January CPI Data 🔥

CPI day has become the most volatile day over the last few months. The last four months saw average moves in the market of 5%.

• September’s number released in October saw the market hit a low for 2022.

• October’s number released in November saw the market soar over 7% in one day!

• December’s number released in January, also sparked a wave of buying

• January’s number released today - Came in hotter than expected and the market’s initial reaction was negative.

JP Morgan put out a game plan yesterday of how they thought the market would react. While January’s game plan didn’t really pan out, this time they seemed to have reduced the volatility of the moves. And while people may not agree with this, they seem to like it a whole lot.

A look under the hood

As always, I look at the breakdown of the CPI numbers, to see what’s been driving the numbers. But, this time all I could think was just when we thought inflation was coming under control, things start to deteriorate.

But, let me assure you that this is not really unexpected. We’ve seen “meaningful progress” in the inflation numbers coming down. But, here’s where things start to get sticky and this is exactly what we saw. The data will take time to rollover from here and there are other forces that may keep it “higher for longer”.

• The January column is sprinkled with more yellow and red meaning inflation has increased in these categories.

• The last column is telling of where inflation has actually increased year over year.

• Please remember a positive change still means inflation is increasing, even if it is at a slower rate. January’s number have 3 items that are negative - Fuel oil, Used vehicles, Medical Care Services.

In my last article on the December CPI numbers, I covered 3 things I was concerned about:

Supply side issues still persist in various corners

and they still do.

With China re-opening we’re seeing commodity prices start to increase as well leading to foodflation. Food prices continue to accelerate. One other important item is the increase in Medical Care Commodities. This includes prescription medication and medical supplies. Some of these are essential goods, so not exactly what we want to see.

Energy Costs may rise again

and they did.

I also noted that once energy costs begin to rise it becomes sticky. So much so, that the Biden Administration is looking to sell 26 million barrels from the Strategic Petroleum Reserve (SPR) in accordance with a budget mandate enacted in 2015. We thought we were done with the SPR releases and they were set to buy again. But, with Russia cutting production by 500,000 barrels per day and China’s reopening, oil prices are rising again. I don’t think this will keep oil prices low for too long as I wrote in my last article. They’re just putting a band-aid over a deep wound. Unfortunately, this can’t last, and US Crude Stocks remain quite low - all leading to higher oil prices.

Wage Inflation - 

Average Hourly Earnings were up and the Employment Cost Index still remains relatively high. The labor market continues to remain tight, having the potential to drive up wages.

Shelter and Transportation

A quick reminder from my Weekend Newsletter that some of the weights have changed. While the effects of these will play out over 2-3 months of data, it’s still worth noting. Housing will have a larger relative weight now at almost 44.4% from 42.4% and transportation namely, used and new cars will have a lower weight at 16.7% from 18.2%. This, however, will affect the headline and core numbers not the category numbers. ⤵️

We saw the rate of shelter inflation increase marginally. We already know that shelter will likely remain sticky until May - June 2023 so this is not a major surprise.

The Manheim Used Car Index turned positive over the last two months meaning Used Vehicle Prices have started to accelerate again. But I mentioned this in a tweet yesterday to say that there’s usually a lag between the numbers, so we won’t see that change just yet. This is why we still saw a drop in the Used Vehicles numbers. However, we might see this perk up again in Feb-Mar.

Other data points to look out for

Retail Sales 

Retail sales numbers come out tomorrow and that will be one to watch for. We’ve been seeing a decline in retail sales numbers, in November and December, no less. These are peak spending periods for the US given the holiday season and one of the catalysts has been the decline in the number for autos. But, January saw an increase of almost 17% in the auto sales numbers and considering that autos is 20% of the headline in retail number, we’re expecting an acceleration.

Accelerating retail sales is a bad for inflation. As we keep hearing Fed Chair Powell celebrate the drop in durable goods consumption number as a win over the inflation.

Vice Chair Lael Brainard Leaving 

The latest news is that the Vice Chair of the Federal Reserve, Lael Brainard, is leaving for to lead the White House National Economic Council, becoming President Biden’s top economic advisor. This is hawkish news. VC Brainard was the biggest dove in the FOMC and most experts say that she had steered to the committee to a softer stance. We don’t know who will be the next Vice Chair but, as things stand, this gives Chair Powell some latitude in being more hawkish in his fight against inflation.

Inflation Expectations 

Inflation expectations are on the rise again. The University of Michigan survey data showed that people expect higher inflation within one year. And yesterday, we got numbers from the New York Fed that showed more people expect inflation to remain high over a five-year period. Interestingly enough, the one-year expectation remain unchanged, and the three-year expectation increased only slightly. But, the theme remains - inflation expectations are on the rise.

When people expect inflation to increase or remain high, they pull forward spending. They want to beat the rising prices and this in turn, causes prices to increase causing more inflation. Volcker was very clear about managing inflation expectations:

If you’d like to learn more about the global macro picture, how to view it in the context of industries and the fundamentals of companies, I provide one-on-one intensive coaching as well.

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