CPI

Hey everyone and thanks for jumping back Into the Macroverse today we're going to talk About the most recent CPI report we're Going to be discussing headline Inflation core inflation that with Respect to the FED funds rate uh and so On and so forth maybe how it affects Things in the labor market too perhaps We'll also talk a little bit about its Effect on risk assets like Bitcoin and All Bitcoin Pairs and Bitcoin dominance But the reality is is I've repeated Myself about 10,000 times on that front So while I might say it again you Already know what I'm going to say Headline inflation came in today about Where expectations were okay so if you Actually go look at expectations Consensus was calling for about 3.4% and it actually came in at 3.4% same thing now technically speaking If you look at it we can see because we Have two decimal places here you can see It actually came at 3.36% so the 3.4% is actually rounded up From 3.36% but it was at least a step in the Right direction right it's progress It's Not a lot of progress and then frankly If you look over the last year it's Basically no progress but it was at Least progress progress from last month Now again I I've talked about this a lot

I know a lot of people are worried about A second wave of inflation I know that Is what is on a lot of people's mind and You can't really blame them especially Considering when you look at the 1970s We had multiple rounds of inflation we Had three clear and distinct waves that Made life very very difficult and you Can see the s&p500 during that time was Not a very fun Market to be in because It just kept going up and putting in new Highs and then going back down and Putting in new lows so that was a fairly Brutal Market back then when you had Multiple rounds of inflation and so you Have once again people worried about a Second wave of inflation as I've said Before if you get a second wave of Inflation it's likely not going to be This year I'm not saying it can't happen I just think that if it's going to Happen it probably wouldn't show itself Until much later on in 2025 or even 2026 I think the bigger risk in the Short term could be rapid disinflation Which obviously for people you know for For for people at the grocery store and That sort of stuff that's not a bad Thing right I mean I I don't really Think there's a single person watching This video that wouldn't like some of These prices to come back down I mean Again we've talked about this before When you go to the grocery store today

You're spending a lot more than you ever Spent four years ago a lot of us would Love to go back to those times the the Reality is is while you might experience Deflation at some point you're probably Never going going to go back to the Actual prices on a lot of things that That we had back in in 2019 it's just It's really hard to go back to those Levels it's not impossible you know it Is possible but you have to imagine that The FED would likely pivot far before Anything like that were to happen again Their goal is 2% inflation not deflation So if they get to 2% you have to imag or If they're on in route to 2% you have to Imagine they will likely start start to Pivot their their monetary policy so in The short Term Inflation I still think there is a risk Of it of it actually not maybe a risk Isn't the right word I think we all want To see it go down I think there's a Bigger chance that it goes down over say The next 6 months then up over a longer Period of time say two years years from Now that's where it becomes a lot more Murky now over the last year you've had People calling for a second wave of Inflation you've also had people calling For deflation and the reality is is that Both sides have been Wrong it's just gone sideways and we

Talked about how that last percent is The hardest percent to achieve it is so Difficult to go from 3% to 2% % because Essentially what it reflects is sort of The uh The Taming of of animal spirits And that's not an easy thing to do and So if you do see it break down to 2% Then it could mean that the animal Spirits have finally been tamed and that Inflation can finally be allowed to fall Back down to 2% it's still inflation you There are people that'll say things like Well you know people are saying we're We're seeing disinflation but prices are Still going up or they haven't come down Again this inflation does not mean that Prices are going down it just means They're not going up as quickly as they Were before which is at least progress Okay so I mean in the short term we've Seen over last year anyways we've seen Inflation basically stay between 3 to 4% We said previously that inflation would Not go down monotonically it would be a Stochastic process and that is the case The reason why I don't think we need to Be worried about a second round of Inflation just yet is because the FED Has not pivoted just yet if the FED had Pivoted already and inflation were not Showing signs of durably going back down To 2% then I think it would be justified to More so worry about a second round a

Second wave of inflation but considering That the FED pivot has not yet occurred Considering that they have not yet beg To expand their balance sheet again I Still don't think that is the primary Risk it could become the primary risk in About one year but right now I still Think that is not the primary risk I Mean I know there are certain things That have been going up um you know if We go look at at some of these you know I mean you have Coco which went up a lot It has been pulling back um I believe Copper is also something that has been Going up recently and and we do know That that can put upward pressure on Inflation but in the short term I I Still think that even if those things Are going up they're probably not going To um you know they're not going to go Up forever they will likely come back Down in short order maybe not to where They were before but I I still do think That there are a lot of forces that Could still lead inflation to staying Below that four to 5% level for at least The rest of the Year now I want to show inflation Year-over-year per category and show why You know despite the fact that some Sectors are are showing you know more Inflationary pressures there are other Sectors that are not for instance food And beverage inflation continues to

Slowly drop right and it's actually at 2.21% so if the FED only cared about Food and beverage inflation they're Already at their 2% objective Unfortunately for the FED there's more To inflation than food and beverages you Also have housing which showed a bit of An uptick last month from 4.5 5 to 4.65% but now it's back down to 4.52% a new low okay and remember the Housing sector does lag if you overlay It with the food and beverage sector you Can often see that the food and beverage Sector tops out well before the housing Sector tops out in terms of Year-over-year inflation also food and Beverages tends to drop a lot sooner Than than um housing inflation so it is True that housing inflation is still way Above the target I mean it's still at 4.52% but it is dropping and other Indicators you know like other Components of CPI tend to lead housing Inflation and those have been mostly Dropping so you have food and beverages Which is dropping and you have housing Which is dropping but not as quickly but Again historically it doesn't drop as Quickly it's a slower move and that's Going to continue to provide a a Headwind I think for CPI that doesn't Mean it's going to go to 2% right but it I still think especially as you get out Of the Q3 Q4 I have to imagine

Especially as we get out of sort of the Peak season for people that want to buy Homes I would imagine that or at least Rent and what whatnot I would at least Imagine that you're going to see Inflation uh continue continue to drop In the housing front apparel on the Other hand has actually started to go Back up recently After being distant or deflationary for About a month it's now back up to 1.35% not that concerning I mean you're Likely going to see it oscillate here Around that zero Mark and oftentimes a Parel does tend to go deflationary at Various Cycles so it's not that much of A concern to me Transportation has Started to go back up recently over the Last couple of over the last couple of Quarters uh hitting a local top here at 4.02% it's back down to about 3 and a Half% now so hopefully that one comes Back down Medical Care this is the one That received a lot of attention about Half a year ago when it went Deflationary no one really believed it Well now it's back up to about 2.63% so again you're what I'm guessing Is you're just going to see a lower high On on this and it should top out at a Lower level than it did back over here And then go back down we also have Recreation this is one that is finally Starting to come down okay I mean this

One stayed up elevated a lot longer than Most but now it's all the way down at 1.51% so this category is actually lower Than the fed's Target because the FED Again the fed's target is is just 2% Overall this one is actually at 1.5% education and communication uh has Just basically been right around 0 to .5% for a while and then finally other Goods and services this is one that is Amongst the stickier components but it Is also starting to to weaken here as it Just dropped from from 4 .7% down to 4.27% so you know if you're looking at Charts like copper and and and you know Coco and and and various Commodities and You're wondering why you know if they're Going up why is inflation not going up It's because there are other sectors Right there are there's housing there's Other goods and services there's food And Beverages and and I mean b by the Way the the retail sales report we got This morning um showed a little bit I I Believe in some sectors showed a little Bit of weakness in the consumer not all But in in some of them Um so that is where inflation Year-over-year per category comes from But you also have to remember that even Though there is inflationary pressures In some categories they're not all Weighted the same when calculating out Headline CPI in fact if you go and take

A look at at inflation year-over-year Approximation of contribution per Category you'll notice that this green Bar accounts for a lot of the headline Inflation and that is primarily coming From housing so headline inflation is at 3.36% housing is more than half of that Right it's at 2.06 of the 3.36 so again If housing inflation continues to come Down then it would suggest it would be a Drag on on Headline inflation right Headline inflation is at 3.36% um and a lot of that is just Simply coming from the housing sector so That is not a huge component the food And beverages is ALS is H housing is a Huge component food and beverages is not I mean while food and beverages has been Going down you can see that only Accounts for about one tenth or so of The entire headline inflation so not a Big not a big change there uh Apparel essentially accounts for it's Negligible when when really looking at Headline inflation you can barely even Notice it if you were to look at Transportation that's a little bit more Noticeable but still it's only you know 0.582 of the 3.36 noticeable but not as not as big of A deal as as maybe housing is Medical Care is is relatively low in terms of Its contributions there uh Recreation Relatively low so it's coming down but

It doesn't have a huge cont contribution And then education and communication I Mean you can barely see it other goods And services pretty low as well right Only 0.11 so again a lot of it is coming Just from housing which would which Perhaps would explain why if you are Seeing you know if we have seen oil go Up and if you have seen copper go up and If you've seen um you know things like Chocolate you know cocoa and other Things go up like why is inflation Coming down it's because there's other Categories and it's also not weighted The same we can also go over to core Inflation so if you look at core Inflation um we're going to go uh figure Out what the uh infl core Inflation expectation was going into Into this meeting or into the into the Report and you can see that consensus Was at 36 and it came in at 36 and prior Was was 38 so if you go look at it it Came in at 3.62 this one continues to Just sort of slowly bleed down which is A good thing I mean you know it's just Sort of a slow downtrend here and Hopefully that Trend ultimately Continues the monthly change on it Hasn't been as drastic as it was before But at least it didn't increase like Last month it was a increase in Coe Inflation which I'm sure is welcome news For the FED obviously it's still a lot

Hotter than they want it to be but it is At least moving in the right direction And if you think about it last year There was a big drop in headline Inflation really going into the summer So I wouldn't be that surprised if out In Q3 we're starting to see headline Inflation drop potentially closer to That 3% level and maybe we'll even see It Go Sub sub 3% sometime later on this Year again until the FED pivots I would Expect that there is still going to be a Drag on on inflation I know it's slow But it doesn't mean it's not happening And remember also you know we never said That it was going to go down in a Straight line we said it would be a Stochastic process and if you look at a Seven-month moving average of it I mean You can see that it has just been slowly Going down you know bumped up a little Bit right here but then it's just Started to potentially go down again so Be aware that headline inflation core Inflation they are down a little bit From the prior month still in line with Expectations um and the other thing to Mention here is that if you were to look At something like the uh us fed funds Rate minus the inflation rate Year-over-year You'll notice that I guess I was looking At this once upon a time you'll notice That it's actually still pretty elevated

So what this essentially means is if you Think about like the FED funds rate at 5 A half% that's not really you know That's not really the risk-free rate Like the risk-free rate would Be that Minus um or it is the risk-free rate but I'm what I'm trying to say is that it's Not it's sort of the nominal right it's Not the real return if you're getting a CD or a t Bill and you're earning 5% but Inflation's at 3% then your real return Is only 2% Okay so what you have to do When you calculate out your risk Adjusted returns is you subtract out you Know as part of your sharp ratio you Know you you you have to basically Subtract out the risk-free rate which Again right now is 5 a half% but Remember it's not it's not the real it's Not that in real terms in nominal terms That's what it is but in real terms um The you know interest rates are Essentially right at around 2.1% because Inflation is still over 3% so you you Have to you have to account for that and So this is something that as inflation Comes down right as inflation comes down Probably later this year this will Likely continue to go up If the Fed is Not cutting rates so if inflation were To drop to say you know 2.5% and the FED funds rate stays where It is at

5.5 then this would go to three okay it Would it would go up so in order to Maintain you know the same monetary Policy stance during a disinflationary Trend the FED would have to cut rates if They don't cut rates during a Disinflationary trend then that could Actually lead to um you know To a deflationary crash basically and it Could I mean you know it could lead to Really tight Financial conditions if They're not willing to cut rates as Inflation comes back down so this is a Big move that you've seen in this I mean You know for a long time it was just Basically going down but now it's Actually you know sort of broken up here Again I'm not suggesting that you should Do any type of technical analysis on This I was just looking previously at at At this downtrend in terms of you know Where were the um where was your real Return and now it's back above you know Back above 2% um and it's probably going To go up If the Fed doesn't cut anytime Soon okay I think the fed's probably Going to cut this summer uh and the Reason is because I I I think that you Know if you look at things like the Labor market like job openings it does Seem like it's coming into better Balance and you know a lot of these Things right when you think about like These different categories um a lot of

Them kind of show you how you know how Inflation has remained sticky I mean job Openings for a lot of these categories Have been fairly sticky for about a year Like they haven't really gone that much Lower than where they were last summer And also inflation hasn't gone much Lower than where it was last summer and That's why you know pal continues to say They will say they will stay the course Until the job is done and the job just Isn't done yet again I do think they Will probably pivot this summer I really Do I I think that they they will and the Reason for that is I I think that um the Consumer is starting to show signs of Weakness a lot of that could be seen in Things like like the dominance of Bitcoin which is something we've talked About a lot um and I I've said Previously that you know after it breaks Through 56% which it already did Previously that it would likely Mark a Transition into a a riskof phase where Altcoins especially bleed back to Bitcoin but also potentially go down in Their USD Pairs and you can see that you Know things like East Bitcoin keep on Putting in new lows and so remember last Cycle it was when all Bitcoin pairs and This is something I was talking about Earlier but it was when all Bitcoin Pairs broke down right here in June and Then the FED pivoted one month later all

Bitcoin pairs I think might break down Either in May or June so it's not that Long and if you're someone who who is Saying well eth Bitcoin um you know if You think that eth Bitcoin is the only Thing that looks weak and your altcoin Is doing well against eth just remember One thing and that is that last cycle Eth Bitcoin actually topped out and then Alt Bitcoin pairs went up for a couple More weeks or so and then rolled over They followed eth's lead and I think the Same thing is happening now you're Seeing eth Bitcoin find this local top From a few weeks ago it's been Capitulating and now it just keeps on Putting in new lows and I think you're Seeing all Bitcoin pairs follow suit as All Bitcoin pairs are potentially Getting rejected here by their bull Market support band which is what I said I mean I I said I think all Bitcoin Pairs will roll over in miday and it it Looks like that is what is potentially Happening Here it looks like all Bitcoin Pairs are rolling over and again going Back to these other ideas that we've Talked about a lot to bitcoin dominance I I said back a month ago that you're Likely going to get a dip after it it it Sweeps this high that should last about Five to six weeks before breaking to new Highs and you can see that we're Currently in week five and we're

Approaching the prior high right so I Think that Bitcoin dominance is going to Continue to go go up into this summer And I've explained that many times um And so be on the lookout for that and I I think a lot of that is how the market Is reacting right yes Bitcoin is up Today obviously you know it's back to You know to 64k 64 to 65k which I know People are excited about but I think the Real story right now is the fact that Eth Bitcoin keeps on bleeding and Putting in new lows which in 2019 Was a a a an ominous sign for the Altcoin market again the altcoin market Did not immediately believe it in fact a Lot of people thought that eth Bitcoin Was just sort of dying off and that Other newer altcoins would take over and And become eth Killers but in reality Eth Bitcoin was giving the warning to The altcoin market for those who cared To listen it's just that most of those People did not care to listen and they Thought their altcoin was going to do Well against e because eth Bitcoin was Capitulating and then a couple weeks Later it also turned out that their Altcoin started to capitulate against Bitcoin as well it just didn't get the Memo as quickly eth Bitcoin often gets The memo it shows you what is happening In the altcoin market it's just that the Altcoin market can kind of run to the

Extremes a little bit easier right it'll Go up a little bit longer go down a Little bit more but this is what we've Normally seen in Prior Cycles is that Eth Bitcoin shows the weakness and then Bitcoin pairs follow suit so I mean it's A good thing that inflation came back Down but the reality is that even though It came back down a little bit the Market is still not looking for Price or For for rate Cuts anytime soon again I Think we're probably going to get some This summer but right now there's a 96.9% chance the FED does not cut in June if if I were only looking at all Bitcoin pairs if they were to break the Range low in in May then I would say the FED should cut in June if they break the Range low in June then I'd say the FED Should cut in July but again I don't Know exactly when it's going to break Down but I could see this I I really do Think all Bitcoin pairs are in the Process of rolling over here and Breaking down and you know Bitcoin when You see these big moves by Bitcoin a lot Of that reason is because other Cryptocurrencies are breaking down you Know if someone thought that eth Bitcoin Had bottomed back in April with the Having there was a lot of people that Thought that and they explained their Reasoning but I always said I think Monetary policy plays a bigger role now

That we took out that low we're at a new Low now those people have to go back to The drawing board and then maybe they Capitulate and say all right you know Bitcoin is a better place to be and so That leads to bitcoin going back up in The short term right this is a a long Process remember it's a long process and Last cycle basically this process went On and on and on until Bitcoin dominance Retraced to the 618 fib retracement and Then after it retrace that right here Then Bitcoin USD also eventually then About a month later fell below its bull Market support band while eth obviously Is already below it so again that's Where we are right now in the cycle um And I I I really do think that you know We're going to see Bitcoin dominance Explode to the upside this summer I Think it'll probably top out this summer Bitcoin dominance I think e Bitcoin Might bottom out this summer um but That's where we stand and that is your Update on inflation and and so on and so Forth so if you guys like the content Make sure you subscribe give the video a Thumbs up and again check out intothe Cryptoverse premium at intothe Cryptoverse decom I'll see you guys next Time bye

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