CPI Report

Hey everyone and thanks for jumpping Back into the macroverse today we're Going to talk about the most recent CPI Report if you guys like the content make Sure you subscribe to the channel give The video a thumbs up and check out the Sale on intothe cryptoverse premium at Intothe cryptoverse tocom let's go ahead And jump in inflation is useful to track Because we do know that it can often Affect market conditions historically When you have periods of high inflation It can lead to rather lackluster market Returns for the better part of 10 to 15 Years depending on how long inflation Persists this this is one of the reasons Why Jerome Powell and the Federal Reserve are so determined to get Inflation durably back down to their 2% Target above that the economy as Jerome Powell often says just does not work for Anyone and it's not to say that layoffs Are a good thing we know that layoffs Are not but it is to say that inflation And and prices going up and up and up is Going to continue to make it harder for Everyone to to just be able to afford Basic necessities so we're going to talk About inflation here year-over year and Then we're going to look at core Inflation we're going to break things Down a little bit more now first of all We can see that inflation topped out Back in you know back in June at least

Headline inflation did and ever since Then it's been slowly coming back down In a somewhat of a stochastic process Which we said is most likely outcome now Back over here in June we suggested that We could see a bit of a bounce in Inflation we we noted back then that Some of the prior headwinds for Inflation were going to become Tailwinds Some of the base effects were no longer Going to be as favorable and because of That we said that in the short term in The next few months we could in in fact See inflation go back up however as time Goes on the expectation in my opinion Would be that it sort of slowly Fades Back to the downside now if you go back And look at at my CPI report video from A couple a couple of months ago there Were certainly a lot of people that Especially in the comment section that Were thinking that oil would continue to Sort of go up and provide a Tailwind for Inflation um but I I said back then that We will likely see it sort of top out Around this time frame around September And see it come back down just because We're going to start to see all the all The lagged effects from all these Interest rate hikes finally start to set In and hit the economy and so I think That's essentially what's happening um The FED has you know that they are being Successful in

Slowly um slowing the economy down the Only question is is are they going too Far have they gone just far enough there Is this theoretical idea that there Exists an interest rate let's call it Rstar which above that level the economy Contracts and below that level the Economy expands and so the the sort of Thing that we have to think about is Well is 5 a half% sufficiently Restrictive now I suggested more than a Year ago that 5.2% would likely be the Terminal rate and I think that it is Sufficiently restrictive I don't think that the FED needs to Raise interest rates anymore it doesn't Mean that they won't but I don't really Think they need to I think that we need To do is just hold interest rates here For as long as they can even if the Labor market shows weakness which it is Starting to do so inflation year of a Year right now is coming in around 3.2% um that's headline inflation and And at least it is starting to come back Down now remember one of the things that I often see people confuse is the the Difference between disinflation and Deflation just because inflation is Coming down which is disinflation does Not mean that you should expect lower Prices lower prices would occur if we Get into something known as deflation But we are not we are not currently in

Deflation at least for headline Inflation we are in certain categories Theoretically but we are not looking at That right now now we can break this Down we can look at the year over year Percentage change per category which I Think is useful to do here you just have Headline inflation so you can see that It's has been slowly coming back down a Stochastic process which is what we said Was the most likely outcome if you look At food and beverages it continues to Come down last month it was at 3.73% now It's come down to 3.32% the issue though Is has the FED gone too far and if they Have then we risk inflation going below 2% and going much lower than that now You might say that that sounds like a Good thing and hey I'm right there with You I wouldn't mind prices going back Down of course the issue is that prices Go back down and and things start Turning in the opposite direction then That would likely negatively affect the Stock market right if if if prices are Generally trending down but food and Beverages has been coming back down Which is a positive sign housing slowly Coming back down right from 5.56 down to 5.25 housing is is one of the things That lags the most so I would I would Suspect that this thing is just going to Keep coming down as the months go on um And and should provide a a headwind for

CPI for a long time and and will likely Make it so that CPI headlines CPI Continues to to drop if you look at Apparel you can see it's currently at 2.62% up slightly from 2.26% last month But still generally you know trending in The right direction if you were to look At like a a three three-month moving Average of course you can see that it is Trending in the right direction that the Federal Reserve would more or less want To see we can go look at Transportation Which has actually um been deflationary Recently if we go sort of zoom in over Here you can see that back in in March April May starting in Yeah March April But then May June and July it was Actually deflationary right now recently It is it has become inflationary again But pretty low this last month it Decreased from 2.37% down to 7 71% so That is is is you know well within the Range of of sort of what we would have Expected medical care um if we look at That it has gone deflationary Theoretically though I haven't really Seen Medical Care medical costs come Down but it is one of the one of the Things that is impacting headline CPI we Can of course take a look at Recreation Which is still in the grand scheme of Things relatively elevated right let me Sort of zoom out here right so it's know Last month it came in at 3.88% now it's

Dropped to 3.18 we could look at a Monthly change on this maybe even apply A moving average to that and see that it Is in a disinflationary impulse um but It is still well above I believe where The FED would want to see it remember The FED wants to see things down at 2% This is still at 3% meaning that you Know rates need to stay higher for Longer in order to achieve this Objective now there's an argument that They should start cutting rates before We get to 2% sort of like a Um to try to soften the blow and achieve A soft Landing but historically the fed You know does not do something like that Until something starts to really look Really weak in the economy you can look At education and communication and see That it come it came down from 1.07% to 9.28% and then other goods and services Which actually went up from 6.01% to 6.19% now if you were to look at a 3mon Moving average of this I mean it still Seems like it's slowly turning in the Right direction but it's taking a long Time you can see prior periods where it Also had some pretty significant Spikes All of which by the way it corresponded To a recession in the not so distant Future or you know we had already we Were sort of coming out of one right Every single time this thing spiked and

You can see right now it it's continuing To stay relatively elevated and again Arguably the FED has to keep rates Higher for longer in order for them to To sort of see this one go back down to Their 2% Target now if you look at core Inflation you can see that it hasn't Really skipped a beat it continues to Come down it's currently at around 4.02% note that this was an area um that We did spend some time at back over here Around that 4% level you know and you Can see if you look at a monthly change That the pace at which it's dropping is Is Um is is slowing down so instead of Dropping by. 26% or 3.15% the last Couple of months now it's only dropped About 0.11% so ideally you know I I think it Would be good if in the coming months we Could see this continue to Trend down if It gets sticky at 4% then you know That's going to it's not really be a Great thing because it just means the FED has to keep rates higher for even Longer than perhaps the market is even Expecting the way this impacts the Markets is because you know as as Inflation remains sticky Then markets if you think about like you Know inflation and how how companies Will sort of pass on the cost to the Consumer one of the things to think

About is if inflation comes back down Then that's going to likely negatively Affect the bottom line of a lot of Companies especially when comparing to Say a year ago when inflation was a lot Higher so that is something that I I I Think we have to consider when when Thinking about inflation but again you Know our expectation for a long time has Been that it would slowly come down that It would not be a linear process that it Would be a stochastic process and it Seems like that has been the case it's Just taking a very long time right and You know here you can see inflation was Around 9% La you know in the summer of 22 now it's down to about 3% in November Of 2023 so it is moving in the right Direction this is a welcome change if You look at the monthly change on this You can see that it's accelerating to The downside last month it only dropped About. 176% this month it dropped about Negative .1 or sorry .458 per. so it does seem like it's Starting to accelerate to the downside Once again but we will need to see it Continue to print these numbers in the Coming months the reason of course how This affects markets is you know we can Go look at at the bond market and and Look to see what they're predicting just Let's reload the page to make sure we Have the most recent data at the next

Meeting the bond market essentially Thinks the FED is done I think the FED Is has done I don't really think they Need to go above 52% if you look at Probabilities there's a not there's Basically almost 100% chance that they Stay at at at 5 a half% come to December Meeting when Powell was asked about the SCP the summary of economic projections From the prior Federal Reserve meeting He sort of brushed off the idea of Another interest rate hike and I think For good reason they don't need to hike Again the labor market is cooling off The the the pmis right these surveys These manufacturing surveys and whatnot They're cooling down the economy is Starting to show signs of weakness they Don't need to hike again in order to Obtain their objective I think they just Need to be willing to hold rates higher In order for to see inflation durably Come back down to Target the issue that They want to avoid is lowering interest Rates too soon because if they do that Then they could just see another wave of Inflation come back over the next one to Two years so the question is is can the FED stay the course until the job is Done which I think they will do I think That they've been embarrassed by this Whole inflation is transitory I I think They're going to do what they need to do Now over the last 2 years their job has

Been relatively easy right I mean Inflation is high see you have to raise Interest rates right you have to reduce The size of your balance sheet it's a Pretty clear outline of what the FED Needed to do but they have two mandates Not only price stability but also Maximum employment and now we're getting To the point where the labor market is Starting to soften up the bond market Thinks that the First Rate cut is likely To happen in May but there's actually About a 33 to 34% chance that it Actually could occur in March which is Really not that far away from now if you Think about what would make the FED cut In March it couldn't be anything good For risk assets if risk assets are Soaring I wouldn't expect the FED to Start Cutting I would expect them to start Cutting if markets are showing weakness The unemployment ratees going higher Etc While the unemployment rate has gone up A little bit over the last few months That's what the has wanted they've Wanted to see a softening of labor Market conditions they wanted to see the Unemployment rate go up they can say Whatever they want but one of the big Issues with inflation is wage inflation And the only way you're going to get Wage inflation to slow down is to soften Up the labor market make it so that that

It's harder for people to find jobs so That you basically turn the market from An employees Market into an employers Market and I think we're slowly starting To see that shift take place but for a Long time They've basically their their their job Has been very easy to do in terms of you Have to raise rates because you don't Have price stability and you have you Know you have maximum employment with Unemployment rate at at like basically 50e lows when it was at 3.4% but now their job does become a Little bit harder and the reason for That is because the unemployment rate is Starting to Trend higher right like take A three-month moving average right you Can see that this thing is starting to Curl back up here The issue with this is that once it Starts to go up it can be very difficult To slow it down and it takes often Several major rate cuts to slow this Thing down so that I think is the Important thing to watch here and in the Short term one of the things that we Mentioned earlier on on NFA live was Continued claims are are still going up Right I mean continue claims are now Higher than they were at any point in 2022 so the labor market is softening up Initial claims are not as high as they Were but again initial claims have been

Low and despite the fact that initial Claims have been low continued claims Have been going up so while people were Getting laid off about the same Pace That they had been for the entire year People were having a harder time finding A job now the issue of course is if is If initial claims continue to slowly go Up then that could be another sort of Tailwind for continued claims to go up And the reason why that's important is If you look at at say unemployment rate Versus CLA claims you can see that Continued claims tends to lead the Unemployment rate and that is continuing To go higher so inflation is an issue The FED needs to get it durably back Down to their target if they don't they Risk something repeating like the 1970s Or the 1940s where you just get several Waves of inflation and I don't think They want that the only question is is Can they stay committed to it long Enough to really get inflation out so we Don't have to worry about it as much in The next business cycle so we'll Continue to follow inflation and see how It's affecting the economy how it might Be affecting markets if you guys like The content make sure you subscribe give Video a thumbs up and again we do have The sale on into the cryptoverse premium At intothe cryptoverse decom I'll see You guys next time bye