The Fed’s CPI Problem

On Wednesday, April 12th, the BLS will release the latest data set for the Consumer Price Index (CPI-U) which consensus seems to think will be a tad bit milder than last month. The evidence from the very same government data sources plus the consumer’s own eyes begs to differ.

The financial media and economist’s consensus seems to predict a 0.3% month-over-month rise along with an annualized decline as the March 2022 data was somewhat strong. The problem is that the CPI has many variable inputs which may well doom their declaration of a “reduced rate of inflation” by the very government data collectors who modified their baseline figures to bring the February numbers in milder than expected.

In fact, this week’s story in Fortune on inflation has highlighted my favorite nonsensical expression of a “growth recession” in an article where they also state:

The latest jobs report is in, and the good news is Federal Reserve policy on inflation appears to be working. The bad news is Fed policy on inflation appears to be working.

-Fortune April 7, 2023

This morning I posted one of the most popular pictures that I have ever posted on Twitter and for some reason it hit a nerve:

Why was this so popular?

I do not have a large following, thanks to the prior Twitter ownership, but the reply hit everyone who can be considered the “average” consumer. Just over a month and a half ago, we were told this by the Biden Junta:

Meanwhile, here’s one more dose of reality for the regime and its state sponsored media followers from my local Publix, taken this past Thursday, the same day I snapped the egg price photo:

For the record, I do not drink Coca-Cola products. But I use this as one of the gauges for what the average consumer is encountering with actual purchase prices for goods at the retail level. This used to cost $1.29 per 2 liter container in 2021. Up to $1.99 a year ago, then $2.29 just over a month ago.

The last time I posted the chart below, prices seemed to indicate that inflation was going to continue to impact the consumer far into 2023:

While beef did decline the past two months due to seasonality, that price will be increasing dramatically as the summer season approaches due to supply chain issues. The end results will be a persistent inflationary problem at the consumer level which will have disturbing consequences for the economy as a whole and soon to follow, for the political elites heading into an election year.

Unleaded gasoline is no longer in the downtrend that the Fed has hoped for either as the turn higher is quite noticeable after a brief winter respite:

As diesel prices begin their seasonal ascent in parallel with unleaded gasoline prices and the OPEC supply cuts hit in May, look for regular unleaded gasoline to far surpass the $4.00 per gallon mark by early May and closer to $4.50 possibly by Memorial Day.

Sadly for renters, the rental price on primary residences are not declining broadly nor fast enough to keep pass with their ever shrinking pay checks. Adding insult to injury, the Manheim Used Car index popped up another 1.5% month over month putting more pressure on middle and lower class households in need of a vehicle upgrade:

The continuing narrative is that inflation is “declining” per the “experts” and political elites. Unfortunately, for the average American family, that is not the statistical economic reality. Thus why I think the CPI reading will come in at 0.4% month over month, possibly as high as 0.5% causing the economists to re-think the central bank’s current “narrative.”

The more reliable and realistic inflation indicator that the Atlanta Federal Reserve Bank produces via the Sticky CPI seems to verify my concerns:

What does this mean for the Federal Reserve?

It pretty much guarantees that the inflation data will continue stickier for longer as the full impacts of prior rate increases from late in 2022 will not hit the markets until late in the Summer of 2023. The odds of a rate increase of 25 bps in May are pretty much a lock, leaving the June and July actions as the major question mark.

If CPI and PCE remains sticky into the summer, the Fed can not pause or cut rates immediately without looking weak on inflation and reigniting the discussions about the rebirth of Arthur Burns. On the flip side, if the Fed’s actions appear to have a major economic impact as projected with a severe recession beginning in August of this year (my new projection), then odds increase the political pressure will mount for the Fed to pause and/or cut rates by October.

The real problem is determining if this current phase of inflationary prices is a short term pulse back to well over 4.5% core rates for a limited duration or the final pass through of producer prices to the economy as a whole despite indications of a future contraction. Regardless, the dilemma for the Fed is if they misread the price action in either direction, the policy decisions they engage in could have lasting repercussions for economic activity well into 2024 and the Presidential election.

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