I apologize in advance for not presenting the long dissertation I promised but after spending the last day and night in the emergency room with my mom, I hope you’ll understand.
Last week the Bureau of Labor Statistics (BLS) issued the now annual revision of the Consumer Price Index which resulted in a shocking change to the prior two month’s numbers. From Reuters:
The consumer price index edged up 0.1% in December rather than dipping 0.1% as reported last month, the Labor Department’s annual revisions of CPI data showed on Friday. Data for November was also revised higher to show the CPI increasing 0.2% instead of 0.1% as previously estimated. In October, the CPI rose 0.5%, revised up from the previously reported 0.4% increase.
In other words CPI, much like the Fed Funds rate, appears to be persistent and “higher for longer” as the new lingo goes. The average street prediction is for CPI month over month to be in the 0.4% range. Most economists I follow predict it to come in around 0.5% but this is where I differ.
The benchmark revisions which will impact the January CPI reading fail to take into account the wildcard of a wage component which many have forgotten to put into their calculations. Many states, including my own of Florida, have implemented staged increases in minimum wages towards a $15 per hour rate. Other states also index the minimum wage to the CPI which for 2022 is a substantial 8.38% if one is to believe the BLS data. Add in the 5.9% COLA for Social Security recipients hitting in January and a juicy stew of wage and benefits increases slams into the January number.
All this before one dime of the “Inflation Reduction Act” begins to impact the inflation rate also, I might add.
Then this consideration which one might want to keep in mind as outlined in the Reuters article linked earlier on the revisions:
Housing now accounts for 44.384% of the CPI, up from 43.008%. This reflected an increase in weight for shelter. Transportation now makes up 16.744% of the CPI, down from 17.737%. Food weight dropped to 13.531% from 13.867%.
While the decrease in weighting for the transportation aspect of the CPI is minor, it was more than offset by a surge in new and used car pricing which should keep that number relatively flat on a non-seasonally adjusted basis. But the increased weighting in shelter should cause a substantial spike in month over month inflation as housing prices and rents in some of the more populated states continues to rise. Once one considers the wage and benefits components, the risk of an upside surprise is far greater than hitting the number or a lower reading.
Thus I am looking for a 0.6% increase in the month over month CPI with the potential due to the revisions of the number coming in much hotter around 0.8% as my dangerous outlier predictoin. All of the inflation that has been put into the pipeline due to the late 2021 surge in prices which rolled through the summer of 2022 is now being compensated for at the retail price level and by employers raising wages and benefits.
Buckle up however as I’m not guaranteeing anything with the illogical and poorly constructed data that has come out of Washington for the past twenty plus years. The politicized BLS could come in lower than everyone’s expectations which would trigger a secondary bear market rally that could become the blow-off phase that some analysts have been expecting.