That Was Fast: CPI Changed From Up 3 Mos. to Flat Last Month to Negative Prediction in December!

Almost everyone sees this week’s inflation news as time to party; however, some stories are already starting to agree with my take on CPI in terms of what aspect of CPI to focus on:

That came a day after the consumer price index remained flat for October, another encouraging sign for investors hoping the Federal Reserve has seen the path of inflation cool enough to stop hiking interest rates.

Yes, the important take-home is that it remained FLAT because that is what happened in month-on-month inflation, as I explained yesterday, and MoM is the inflation that is happening today. So that is encouraging news, I guess, on the basis that getting nowhere with taking inflation down further, is good news. Suddenly the press is quoting month-on-month inflation because year-on-year includes a lot more influence from the past than monthly does, and the past is still helping take YoY numbers down.

From another story ..

Inflation was flat month over month, according to the latest consumer price index report from the Labor Department on Tuesday.

But those same stories are also saying,

Walmart CEO Doug McMillon said deflation could be coming as general merchandise and key grocery items, such as eggs, chicken and seafood get cheaper. He said the retailer expects some of the stickier higher prices, such as the ones for pantry staples, to “start to deflate in the coming weeks and months,” too….

“In the U.S., we may be managing through a period of deflation in the months to come,” he said on the company’s Thursday earnings call….

Home Depot CFO Richard McPhail said “the worst of the inflationary environment is behind us” on an earnings call Tuesday….

Those are the people on the ground who ought to know. So, both articles agree that, in summary, inflation merely remained flat (as in stuck at the level it was at the month before, not “flat” as in not happening at all). But even the major retailers are running with the new idea that we are instantly going to go from an environment where prices have been rising again to prices that are actually falling … at least on the kinds of items sold at Walmart and Home Depot, which covers a lot of ground. Forget the fact that even year-on-year inflation is still 3.2%; we’re going straight to negative inflation.

Just like that it is over!

The Fed alone doesn’t agree:

Cleveland Federal Reserve President Loretta Mester said Thursday that this week’s news showing lower levels of [YoY] inflation isn’t enough to convince her that the central bank has won its battle against higher prices.

For once I’m with the Fed? That’s odd ground for me to be standing on. Reading the news widely, it seems everyone but me and the Fed believes the inflation fight has ended, even to the point where price changes next month are suddenly being predicted by major retailers to go negative.

Whew! That was fast. Too fast for me to believe it. So, I’m afraid I’m going to have to stand with the Fed on this one (as the only reasonable ground left in this bizarrely rosy-eyed Wonderland):

“We’re going to have to see much more evidence that inflation is on that timely path back to 2%. But we do have really good evidence that it has made progress and now it’s just, is it continuing?”

“Much more evidence.” Is the Feds’ progress going to continue? That is the question I’d be inclined to ask when inflation goes from three months of starting to rise again to a flat month where it was, at least, no longer rising again, to predictions that leap clear past lowering inflation in the months ahead directly to deflation. Apparently, I and some Fed members are the only ones finding that a bit … er … incredible … as in literally “not credible.” After all, even this third article quoting Fedhead Mester admitted,

In separate reports, the Labor Department said that consumer prices were unchanged in October from the previous month.

So, the reality that created so much hullabaloo yesterday was simply that inflation didn’t rise over the past month; but that has gone straight to a new unreality of “inflation is about to reverse all the way to negative.” We somehow conveniently even skipped right over the three months where it actually was rising each month without a whisper from the mainstream financial media.

We’ll see. And, remember, I’ll be covering in my “Deeper Dive” how the YoY number was actually a lie anyway; but who’s going to look that deep when they are so busy imagining new realities?

Is the Fed suddenly the only entity left in the world wondering if month-on-month inflation might actually be what matters most in determining which way inflation is heading, being the most recent prices reported? YoY tells you where inflation has gone over the course of a year; but if that turned up for three months and then did nothing in the next month, that pause was, at best, the end of a brief upturn.

But then we have this little gem:

While the producer price index fell below the Fed’s 2% 12-month inflation goal, the consumer price index was still at 3.2%, and even higher when excluding food and energy, at 4%

Eh hem! First of all, the Fed doesn’t even have a target for the Producer Price Index. That’s a whole different set of measurements, and while dropping below 2% in the PPI is a good thing, let’s note that CPI, even in that statement, is “STILL” at 3.2% but actually has risen higher if you exclude energy. Why? Because the sudden drop in energy prices is the only thing that even kept CPI inflation still at 3.2%. Without that, CPI would have gone HIGHER to 4% (food not being the major factor at the moment that the change in energy prices was).

I’m not comfortable with the Fed being the only party mentioned in the press that currently agrees with me that the fight isn’t over, but that appears to be where I’m stuck. Uncomfortable as I am being out at the tip of a ledge with only the Fed for company, that’s where I choose to remain standing.

Following the reports, market pricing in the futures market completely eliminated the possibility that the Fed would be approving any additional interest rate hikes. Moreover, the market is now pricing in the equivalent of four quarter percentage point rate cuts next year, according to a CME Group gauge.

Apparently the Fed didn’t get the memo that was sent out to the financial media and, hence, to all the marketeers on Wall Street:

But Mester said she’s reserving judgment on where policymakers go from here….

“My feeling is that it’s really not about cutting rates. It’s really about how long do we stay in a restrictive stance and perhaps have to go higher given what happens in the economy,” she said.

Well, it’s me and Mester for today. The entirety of mainstream media and all the market pundits have gone sailing together on holiday, cracking open the champagne bottles, getting ready to give Thanksgiving for their Santa Rally they are sure will come. At least, the fall in energy prices took the wind out of the stock market’s sails today, just as the party had begun. All the major indices got stuck in the doldrums due to falling energy stocks, bringing down the averages.

Bonds, too, have, again, stopped being the smart money — a position they had only recently gained when the bond vigilantes woke up — with yields having fallen off a little cliff over the rosy inflation news, falling further again today. So, they're all in. All markets are believing the inflation fight is over. Looks like the sirens sung the vigilantes back to sleep.

Better-than-expected inflation data has boosted stocks this month. With November about halfway through, the S&P 500 is up more than 7% for the month, while the Dow has advanced more than 5%. The Nasdaq has leapt over 9% in the period.

Loneliness isn’t all it’s cracked up to be, but I stay with my position that even the deeply flawed inflation data barely made it to going nowhere between the last two months reported. And, if the data were real, the change in inflation wouldn’t even be as good as nothing!

Sighs.

Not only is the Fed not as certain as all the other revelers seem to be that its battle is now over, but it also sees no end in site for its QT (balance-sheet reduction) which is where the real money vaporization happens as it directly depletes bank reserves:

The three newest Federal Reserve governors, including Vice Chair Philip Jefferson, have told a U.S. senator it's unclear how much further the central bank's balance sheet wind-down process will run, but said it is likely the process faces no imminent end….

"Under plausible assumptions the size of the balance sheet could decline considerably further before reserves reach the level consistent with the ample reserves operating framework," Jefferson wrote in response to a series of questions from Scott about the roughly $8 trillion balance sheet….

Speaking after the central bank's Oct. 31-Nov. 1 policy meeting, Fed Chair Jerome Powell said it was "not considering changing the pace of balance sheet runoff. It's not something we're talking about or considering." In recent comments, Cleveland Fed President Loretta Mester said the process could go on for another year and half to two years.

So, I also continue to stand — albeit perhaps alone — by my prediction that the Fed will tighten until MORE things break (some things having already broken this past spring), and will grind us right down into that recession that is now upon us like a heel on a cigarette butt.

Labor yawning

In terms of recession data, the labor market appears to be continuing a slow turn toward more unemployment, though the data has been hugely flawed. Even today’s report notes that “seasonal adjustments” distort the data so much that its hard to draw meaning from it:

Still, the rise in both initial and continuing claims likely does not signal a material shift in labor market conditions. Economists noted difficulties adjusting the data for seasonal fluctuations following an unprecedented surge in applications for unemployment benefits early in the COVID-19 pandemic.

One of the difficulties they have is that they totally misunderstand the tightness. They can’t get their head out of a box made in the past to realize labor has never been strong since early in the Covid-19 pandemic. That said, IF labor is putting in a meaningful turn toward increasing unemployment, it means layoffs have taken jobs down to where even the smaller labor pool is starting to experience some unemployment, and that would certainly be a sign, if true, that we are right on the cusp of a hard recession because, if you cannot even create enough jobs to satisfy a shrunken labor pool, you’re in bad shape; and recessions always begin as soon as unemployment makes an upturn of only about 0.4 percentage points above its lowest point in the cycle., which was where we already sat at the last report. That would make this the report that says recession has begun if the economy acts like all past situations in how a recession times out with initial rises in unemployment.

"We have reservations about the seasonal factors, which may have been distorted by claims during the Covid period."

Ya think? Everything in labor was distorted by the Covid period, which is why the Fed, in using labor conditions as one of its primary metrics, is certain to over-correct because it is a faulty gauge right now. It’s calibrated to the old ways we used to view labor, but we’re in a whole different labor world than the one the gauges were calibrated in.

For instance, even many of the new jobs that have been created have been taken by the old people who already had one job because the labor pool doesn’t have enough to fill new jobs as I reported here recently (See: “Powell Drops a Sledge Hammer on the Market's Dull Head”). That’s happened because many people have felt forced by inflation to take an extra job.

So, the new jobs didn’t represent newly employed people. Thus, unemployment wasn’t rising for a long time because people who did get laid off went straight to a new job. Others had already taken a second job, which means, if they got laid off from one job they likely wouldn’t even qualify for unemployment because they still have a job. It’s just a whole different labor world.

For anyone interested, here is my latest podcast interview on GoldSeek Radio - David Haggith: Gold Will Survive the Economic Crash Best