Inflation Fights Back

That shift I said we could expect from inflation rising month-on-month in the latter half of 2023 to inflation rising year-on-year as the “basis effect” got worked through arrived in full color in today’s CPI report. The report for December inflation leaves no question that inflation is now rising on a year-on-year basis, which means no question that the Fed’s inflation fight has gotten harder.

Let’s look at today’s inflation report as described in Zero Hedge, since they’ve been betting the Fed’s inflation fight is close enough to over that the Fed will pivot even though there is currently no known damage happening in the economy to need a pivot (at least, that the Fed acknowledges or seems to even see), which must mean the inflation fight in ZH’s view is as good as completely over, or why pivot? Just for the heck of it?

Headline CPI Hotter Than Expected In December, Food Costs Hit Record High

According to ZH and CNBC, month-on-month inflation jumped up two-tenths of a point from where it was last month, which was one-tenth of a point above expectations. The year-on-year measure, however, came out even worse and climbed from 3.1% in November to 3.4% inflation in December, which was also two-tenths of a point above the small rise that was supposedly expected. Remember everyone kept insisting the YoY rate had not been rising; while I kept insisting, “If month-on-month keeps going up, then the rise will show up in YoY in time,” and suggested that time would be about now as the base effect began to diminish.

Now you can see how all that talk about how year-on-year inflation was still going down wasn’t really true, as the YoY graph shows a clear (albeit) bouncy return to a slow upward trend in inflation:

Clearly, due to those months of rising MoM inflation I’ve been talking about, the Fed has made no progress even on YoY inflation since the middle of last year based on this measure. This is why I’ve been saying the idea that the Fed is going to pivot to a massive number of rate hikes (6) in 2024 is beneath stupid. Why would they do that when they are saying they see no recession anywhere in sight and when they can clearly see they have to do some serious boot stomping on inflation’s snaky little head if they are going to get it back down again? It never made sense. Pure fantasy based on how desperately the market hopes it will. Yet, EVERYONE, even Zero Hedge was preaching the pivot as if it could actually happen. Why would the Fed even think of pivoting with YoY inflation looking as stalled out as that?

Goods deflation has stalled as the used cars and trucks index rose 0.5 percent over the month, after rising 1.6 percent in November.

Clearly goods deflation has stalled! Next notice how slyly and dishonestly Zero Hedge suddenly pretends they were never in the pivot camp now that this CPI report has laid to rest any faint notion that inflation did not return to rising during the past few months:

More problematically for The Fed (and the rate-cut 'hypers'), is the fact that Core CPI Services Ex-Shelter (SuperCore) rose 0.4% MoM, upticking the YoY rise to +4.09%... This is a category that Fed Chair Jerome Powell and other policymakers have highlighted as a focus.

Excuse me, but ZH was ENDLESSLY one of the “rate-cut hypers” that they now seem to distance themselves from. They beat the Fed pivot like a drum. But now even the year-on-year numbers for “SuperCore” CPI are rising year-on-year, as I said you’d start to see about now because the base effect that benefited YoY inflation will be fading over the months ahead. (That is the effect of YoY inflation having been aided to the downside by the fact that the Fed made huge improvements on inflation from high months in the first few months of 2023 to all the latter months where it made almost no improvements and even saw things get slightly worse. Those are, in other words, easy months for YoY inflation to come down from.

Moreover,

All the subsectors of SuperCore rose MoM with the shelter index increased 6.2 percent over the last year, accounting for over two thirds of the total increase in the all items less food and energy index.

Ah, but if you add in food it gets even worse; and, as I said you could expect, energy is no longer any help, because the big drop in energy ended:

The next time someone from the Biden administration says 'inflation is down' in an attempt to gaslight the public into believing 'prices are down' - show them this chart...

• Headline costs at record highs

• Core costs are record highs

• Food costs at record highs

• Fuel costs on the rise again

The next time ZH tries to gaslight its readers into believing it was right that the Fed has pivoted (having predicted it would for over a year and a half), maybe they should go back and read that, too. How is the Fed possibly going to pivot when its jobs mandate is cutting it no slack while inflation is starting to lick back up the Fed’s backside again with tiny tongues of fire?

Powell is in a real pickle now

Yeah, and a pickled Powell doesn’t pivot!

Said some marketmakers today:

Richard Flynn, managing director at Charles Schwab:

If today’s report is the start of an upward pattern, there is a good chance that the Fed will delay rate cuts until later than previously expected. It looks like the market may have jumped the gun in penciling in as many as six Federal Reserve rate cuts in 2024.”

No kidding.

Brian Coulton, chief economist at Fitch Ratings:

“Looking through the small rise in headline inflation - which was due to energy prices rising -- I think the message from this release is that core inflation is proving sticky....This will give the Fed grounds for caution and they are unlikely to cut rates as quickly as the markets currently expect.”

Phillip Neuhart, First Citizens Bank Wealth Management

"The print is a reminder that the cooling of inflation to the Fed’s target will take time. With core inflation still near double the Fed’s target, we remain skeptical that the FOMC will cut the overnight rate as soon as the March meeting."

Bloomberg Economics’ Anna Wong says:

“The surprisingly strong CPI print shows the road to a durable return to 2% inflation is bumpy, and the last mile could be difficult. Some of the disinflationary impulse for core goods – a key driver of easing price pressures over the past few months — has faded.

All of these statements confirm this whole episode has turned out exactly as I have been telling you it will—no pivot until serious damage to the economy is done, a return to rising inflation, forcing the Fed to tighten higher for longer or, at least, hold rates at this level for longer, assuring more damage comes. From two years back, I’ve been saying inflation will be much harder to battle down than any economist or mainstream financial writer or market analyst was saying or realizing (including even Zero Hedge) and that it would rise again last year and continue doing so on into this year, which would force the Fed to keep tightening us deep into recession because its jobs mandate would not let up and give it an excuse to stop. Only the last part has yet to be proven. So, who has steered you straight on things almost no one else—even ZH—was saying?

Yet, with all of that, ZH still couldn’t resist pumping the pivot for March along with the rest of the rate-cut 'hypers':

In other words, this month's hot print will be followed by an "unexpectedly" cold report, just in time for the March rate cut…

Good grief! Even when they are so starkly wrong, they keep trying to drive that message from some inconceivable reason, other than maybe sowing confusion in America. Of course, the clear evidence that inflation is rising, as predicted by almost no one else, gave bond investors a momentary shake, but for now the vigilantes seem to have easily fallen back asleep, apparently believing like ZH that December’s print will prove to be just a one-off. The folly of the Pivotheads continues, even though inflation has proven itself back on the up trend as NONE of the Pivotheads predicted.