All METARs are aware by now that Fed Chair Jerome Powell has invoked the stalwart Paul Volcker in his repeated effort to convince the public (and the markets) that the Fed will raise the fed funds rate and continue QT until inflation subsides to the Fed’s desired inflation rate of 2%.
But…what is inflation? There are several different measures of inflation. Different agencies massage the numbers differently and get different inflation rates.
The Bureau of Labor Statistics (BLS) generates the Consumer Price Index (CPI). The CPI is used to adjust the yield of I-Bonds and TIPS.
**The Consumer Price Index for All Urban Consumers increased 8.3 percent for the year ended August 2022. Over that period, prices for food at home increased 13.5 percent, the largest 12-month percentage increase since the period ending March 1979. Prices for food away from home increased 8.0 percent for the year ended August 2022, the largest over-the-year percentage increase since an 8.4-percent increase in October 1981.** [end quote]
The Fed prefers the Personal Consumption Expenditures Price Index from the Bureau of Economic Advisors (BEA).
Change from Month One Year Ago July 2022 6.3 % June 2022 6.8 % May 2022 6.3 % April 2022 6.3 %
Here is a chart showing the median inflation rates from both sources overlaid. According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy. According to newer research done at the Cleveland Fed, the Median CPI is even better at PCE inflation in the near and longer term than the core PCE. The August 2022 median CPI is 6.9%. The median PCE is a hair under 5%.
The Fed looks at the Sticky Price Consumer Price Index less Food and Energy which is 6%. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis.
An important news item which quickly dropped off the radar was the settlement of the railroad workers’ union contract. The five-year labor deal, retroactive to 2020, includes a 24% wage increase over 5 years plus $5,000 in bonuses. It still needs to be ratified by union members — a process that could take weeks — but workers have agreed not to strike while the votes are tallied.
Having experienced the strikes and wage-price inflation spiral of the 1970s, I think this is an important story. Unions all over the country will take this as a benchmark for bargaining. Already, personal disposable income has been rising rapidly, although real income is flat due to inflation. In the 1970s, workers demanded more to stay ahead of inflation, driving inflation upward in the process.
Although inflation has declined due to the drop in gasoline prices, electric bills are soaring due to rising natgas prices.
Inflation has not yet responded to the Fed’s medicine. The markets tanked on the fresh inflation news. All stock market internals fell. VIX rose.
The Fear & Greed Index fell into Fear. The trade is risk-off.
Treasury yields continued to rise at all durations. 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity, a reliable predictor of recession, fell back.
The 30-Year Fixed Rate Mortgage is 6.02%, over twice the rate at this time last year. As a result, home sales are falling.
The METAR for next week is rainy. Autumn has arrived. The market is falling and will continue to fall until inflation subsides since the Fed’s policies are slowing the economy. But winter is not here (yet). The stock and bond market losses have not (yet) led to a crash as the bubble seems to be deflating gently (so far).