7.7% CPI: Buy Everything
We have inflation figures for October. My general thoughts on the print and how I think we should approach the news with our investment dollars.
Okay before jumping into the charts today, I want to be clear; I am not suggesting investors indiscriminately buy everything - I’m just mocking the immediate response by the market. It’s hilarious. Here’s what’s happening; CPI came in slightly beneath expectations for October. The market response has been enormous. Why? The belief that the Fed could view this CPI print as an indication rate hikes have worked and inflation has peaked. Maybe? But that’s the narrative the market is running with.
I personally think Fed hikes are probably done regardless of what CPI says but I felt that way two hikes ago, so what do I know? It could easily be argued that rate hikes are more about saving face than fighting inflation. The reality is rates can’t continue higher unless the central bank really is determined to crash the entire economy. Reason? US debt spending can’t be refinanced 5% or the federal budget will quickly become more about interest payments than social programs and bombs in Ukraine. I don’t think why the central bank claims hikes will slow down matters as much as the reality that hikes may slow down (or stop entirely).
What matters?
Here is a nice chart of the CPI trend over the last several years:
October is now the fourth consecutive month of declining year over year headline CPI. There are still problems though when we look at the top 5 contributors of the headline number:
CPI (as the BLS measures it) is really only coming down because gas prices have been trending lower for several months. Look at shelter! It’s still going the wrong way and I highly doubt that trend will reverse and here’s why:
Home sales have already started falling but year over year price changes haven’t. Those didn’t peak until May 2022. Since CPI figures are lagging indicators, there is likely still room to rise in year over year shelter increases as a CPI component. The other problem is gas was the second contributing factor and oil correction looks like it may have bottomed:
The point is, I’m not sure CPI has actually peaked. We may see some of the other components come down due to declining retail sales, people getting laid off, and services getting cut, but the message certainly seems to be price increases in “real things” isn’t over. The dollar is getting absolutely obliterated in response to the CPI print:
Judging by that 37 RSI, there is still plenty of room to go lower in the DXY. The markets are saying risk on. We must listen. Here’s what I did yesterday afternoon and this morning:
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