CPI Report

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 we're going to Discuss the impacts of this report on Interest rate projections by the Federal Reserve and discuss whether their their Strategy here is is effective in Bringing inflation down or if there's a Risk to the upside if you guys like the Content make sure you subscribe to the Channel give the video a thumbs up and Also check out the sale on intothe Crypt Premium at intothe crypto.com link is in The description below let's go ahead and Jump in inflation is a very important Thing to follow the markets are often Reactionary towards it if you were to Look at the 1970s you'll find examples Where the market tops out right the Market tops out as inflation is Accelerating and often times it'll Bottom out as inflation is topping right You can see it over here again right Inflation topped out the market bottomed But inflation right here as it re Accelerates inflation tops and so back In the 70s they went through this period Of like stop and go where basically they Would go to looser monetary policy to Tighter monetary policy back and forth Until we got an inflationary decade and They were unwilling to do what needed to

Be done to get inflation durably back to Their 2% objective Inflation headline headline inflation Today came in at 3.1% which is marginally lower I mean You can see last month it was at 3.2% or So so it came out a little bit lower so At least some progress was made right But one of the most difficult challenges For the FED is that last percent right It's never that hard historically as Long as they raise rates right it's Never that hard to get inflation back Down to around 3% what's the hardest Part is that last percent to go from 3% To 2% and we can learn something from the Mistakes of the 1970s if you go to the Grocery store today and and you get you Know your normal groceries you're Probably used to spending a certain Amount up until the last couple of years But then now you go and you're probably Spending 50% more than you used to just Because everything has gone up so much Right now think about how painful that Is to you know how how how just how much More expensive everything is that's one Peak that's one inflationary wave that Led to that pain now think about the 70s And what they went through back then and Three Peaks of inflation right three Separate waves of inflation it's one of The reasons why like you know when when

Um people who were you know were born Back in the you know the 50s and the 60s They will say things like you know Things used to be so much cheaper right Well we're going to be saying the same Thing right in 30 years we'll be talking About how much cheaper things used to be Imagine what they went through though Right Three Peaks of inflation that's Why things were so much more expensive Today than they were back then now we're Kind of getting a glimpse of what they Went through back then with at least This first major wave in inflation I Will mention there is a caveat to the CPI calculation the way they calculated Inflation back in in the 70s is actually Different than it is today and I'm not Suggesting that they're doing it for Some nefarious reason I think they're Just trying to figure out the best way To calculate it the problem of course is That it makes it difficult to compare Right you're not really comparing Apples To Apples you're comparing two different Methodologies imagine if you were a Researcher carrying out some type of Experiment and to calculate a certain Set of data you C you you use some one Methodology and then you use and then to Get other data you use a second Methodology it would not make sense to Then comb combine those data sets into a Single data set if the methodology used

To obtain them was different but that's Essentially what you know what we're Doing when we look at inflation Year-over year because we always look at At what these you know the trends over Here but remember these Trends were Based on a different calculation than They are today I went through a little Backof the envelope calculation to Figure out what this would have been had They calculated it out using the Methodology back over here and it turns Out we would have gone higher right I Mean you know inflation sort of topped Out around 9% year-over-year I think it Would have gone a little bit closer to This peak in 1974 had they calculated it in the same Way so just be aware that these Peaks Over here can look quite daunting but They're actually not that dissimilar From what we just experien it's just That the method to calculate them was Different so what can we learn from the 70s and and why has Powell said so many Times that they want to avoid those Mistakes okay let's take a look so There's this decade right here and you Can see that from 1970 to 1980 we Essentially had four Recessions which is crazy to think about Because when you think about today and The current age we haven't really had a Recession in a long time yes there is

The pandemic but if we exclude that and I think it's reasonable to exclude it I'm not trying to pretend like it didn't Exists it does it's just that it's not The typical business cycle that you get Right like it's not the typical Cycle where it takes years and years and Years to play out that ultimately leads To a recession that then lasts for Several quarters right if you look at This period over here where there were Four recessions what do you notice You'll see periods where inflation went Up here it went up to about 6 and a Half% remember the calculation was Different back then and then it came Back down to about 3% which by the way is where we are Today right we're about at at around That 3% level and back then the Fed was Unwilling to do what they needed to do To get inflation durably back to 2% Right and what happened is we saw Inflation re accelerate right it re Accelerated back up now interestingly Enough there are some similarities right I mean if you look at at when the market Topped out it topped out you know December January of of the I mean December of 68 it then found this bottom Um in in I guess June of of 19 or may of 1970 but then it it re accelerated right You can see that as inflation came down The market went up right the market went

Up as inflation came down but the market Topped out as inflation started to re Accelerate why did the market top out Well you have to remember like right now The market is expecting rate Cuts next Year Market's expecting rate Cuts in 2024 starting by May and and some people Are betting I mean there's at least one Person betting on it's going to start in January it's probably a bit too soon There's a reasonable chance it occurs in March but consensus right now is that Rate cut start by May the question is is does that Represent higher for longer with what The FED meant and is that if they were To start cutting in May would that be Sufficient to bring inflation durably Back to their target remember if they Cut prematurely we run the risk of Inflation re accelerating like we saw in The 1970s and if you look at the market This is the S&P 500 you can see the Market it actually put in a higher high But it topped out as inflation was Starting to re accelerate right as it Got back to 3.6 3.8 you know before it Got back to 4% the market Market was Already starting to Trend back down Because it re it recognized that tighter Monetary policy was on the Way and then you can see again that it Then the market bottomed out in 1974 as Inflation peaked

Again and then yet again after it peaked Inflation came back down to 5% and then It re accelerated again now this time When it re accelerated the S&P did not Even go put in a new low but bear in Mind it had just gone through a decade Of lower high lower lows and lower highs Right so in 1966 we had a low then we Had a high then we had a lower low and Then a higher high and then a lower low And then so finally we did get another Inflationary wave but it did not Correspond to the S&P going to lower Lows it did correspond to some Recessions where people were getting Laid off but it did not correspond to The S&P putting in a lower low after we Got out of that decade of of higher Highs and lower lows but it shows you That if the FED raises rates they can Bring inflation down the hardest part is Getting back to 2% and you can see that Back over here they weren't even able to Get back to 2% until we we actually got Two back-to-back recessions I I think They finally threw in the towel and and Vulker you know he did what needed to be Done to get inflation durably back down To the 2% Target so this is what we to Avoid this is what po has said that they Want to avoid the reason is if inflation Starts to re accelerate the markets Probably not going to like that I mean It in the short term it can it can

Always go up right I mean it even Started to go up over here it even put In new highs the problem is if it starts To go back up you know to you know in Another inflationary cycle another Inflationary wave the market is Generally not going to like that now you Have some examples right some of which The market put in a lower low some of Which it basically just didn't go Anywhere for a long time I mean if you Look at this it it sort of went up to This plateau in 1976 and was still Basically at that level four years later Okay so that would be a very boring Market you know to be in to basically Just be flat for for many many years and Really it was flat for a lot longer than That if you consider that back in 1968 The S&P was at was at 100 it's kind of Weird to say that right at 100 went Today to like you know 4600 but it was At 100 back in 1968 it was at that same Level In April of 1980 12 years later after This entire inflationary decade and they Made a lot of mistakes back then as you Can see right inflation went up and then It came down and then it went up and Down and then up and then down and it Was just a game of of of chicken Basically like you know the fed's going To cut we're going to go back to loci Monetary policy oh they didn't do their

Job we exploded inflation exploded back Up to the fide so Today we're kind of in a similar spot Where like headline has bottomed out Locally around 3% the question being is will the FED do What needs to be done to get it durably Back to 2% and we'll we'll find that answer out I guess in 2024 you know we will find it Out in 2024 because if they don't if They don't do what needs to be done then The market might have to start pricing In more rate hiyes Later on if inflation were to go back up I mean like if inflation were to start Trending back up to 4% or 5% do you Really think the fed's going to cut Probably not so what that means is the Fed needs to stay higher for as long as They can to sort of break this down to 2% if you want to know what I think Which by the way just for the record I Often get things wrong right so let's be Clear about that but if you want to know What I think I think that they will do What needs to be done But it it's really hard knowing the Timeline on that you know I don't really Think they're just going to let Inflation run back up to 7 8 %. I think That that they would continue to hike if They need to but there is evidence Already that in many sectors inflation

Is starting to come back down right we Are getting Disinflation remember though there is a Difference between deflation and Disinflation disinflation is a good Thing because it means that we're going Going back down to to where we need to Be deflation while I know a lot of People would celebrate that if it meant Lower prices um and who wouldn't want Lower prices right but the problem with Deflation is that it can lead to a lot Of I mean it can lead to you know to Recessions can lead to layoffs that sort Of stuff so you have to be careful so It's a fine line to walk the sort of Maintaining the FED funds rate at a Sufficiently restricted level long Enough to bring inflation durably back To 2% but not too long long to push the Economy into into a downturn a more Substantial Downturn if we were to break down Inflation year of a year per category it Might give us insight into where things Are headed this is what headline Inflation looks like okay this is this Is what we just looked at on the other Screen but now what we're going to do is We're going to break it down to see what Parts of the economy are experiencing Disinflation food and beverages it's Been coming Down and it's actually backed to 2.96%

Right so it's it's back below 3% it's Trending in the right direction and if You look at the monthly change the Monthly change while Negative isn't as negative as it was Previously right so the rate of change Is slowing down right it was 8.5 the 5.9 Then 4.9 then .4 then. 366 so that's a good thing for The FED that it's coming down but the Rate at which it's coming down is slow Slowing down because they want to avoid This going Negative I know a lot of people here Would celebrate if it went negative I Mean who doesn't want you know prices to Go down but again there's a there's a Fine line to walk between a a soft Landing where inflation goes back to 2% And a hard Landing where it goes back to Maybe 2% or maybe even less because the FED remained too tight for too long too Restriced for too long so food and Beverages is coming down Um and if we were to look at the monthly Change 3mon moving average you can see That it it is slowing down so we'll keep An eye on that and we we've been keeping An eye on it and remember last month it Was at 3.32% so this month is down below 3% so that one's making progress that's Good to See housing is sort of like it's like The Achilles heel to inflation because

So much of the contribution to CPI is Just coming from housing and Unfortunately housing has Strong lagged effects the problem is if The FED is relying on some of these Things to get back down and it's I mean They they prefer you know certain Certain ways to measure it but if They're you know if they're looking at Housing and thinking that I needs to Come back down to 2% before they cut That could actually lead to a hard Landing because look at look at housing I mean it didn't even top out inflation Did the inflation year-over-year didn't Even top out until January 2023 compare That to food and beverages where it Topped out in August 2022 you're talking About half a year Sooner half a year so the problem here With housing is that it tends to lag a Lot and it only dropped from 5.25% to 5.2% over the last month so the monthly Change is still negative but this is Still a long way from where it needs to Be I mean you know you'd like to see Housing all the way back down to 2% to That's a long way to go from 5 % down to 2% again there's some lagged effects and My guess is that housing inflation will Continue to come down and that's Actually one of the reasons why I think That inflation year-over year will come Down because while some things some

Sectors could start to re accelerate Inflation from the housing sector should Be a a headwind for inflation that's my Opinion a couple of months ago when we Did this video and you can go back and Watch it it either from August or September I I mentioned that you know Back over here we mentioned that it Would likely bounce because some of the Base effects were going to be wearing Off but that once we got out to September it could Mark a local high and It start to go down again now back then Oil was moving up right so if you look At August and September oil was moving Up and so a lot of people were not Really of the opinion that inflation Would then sort of start to fall again But it has right like it has fallen Energy energy price Has Fallen obviously Has contributed but the problem I I see Is that again with the housing sector If The Fed goes too far it could lead to a A hard Landing so because housing just Takes so long to really catch up to the Rest look at apparel so if you look at Apparel it actually had a really big Drop okay and this is something to watch Because again this is one of those Categories that was trending at 3% for a While and then it got to 2% which you know leads to some Celebration right back to 2% now it's at 1% right now it's at

1.19% so it's starting to drop quickly So I think the issue for the FED is that There are some sectors like apparel food And beverages right there's some sectors Where it really seems like things are Are slowing down right like it we're in The disinflationary process it's getting Back to 2% but then you have these other Sectors like housing that are probably Not as bad as they seem when you just Look at the data just simply because it Has a lot of lagged effects go to Transportation that was actually Deflationary not that long ago now I Wouldn't pay too much attention to the Deflationary trend in in transportation That's something that actually happens Quite frequently with Transportation um You'll find periods where it goes Deflationary and often times sometimes It corresponds to recessions and there's Obviously a lot of times where it Doesn't so I wouldn't put too much Weight into the transportation sector um But do note that it it you know I mean Here you know forget 2% I mean it was it Was at4 1.2% in June and of 2023 and now It's just trending right above you know Right around 7.8% so that one is is more Or less in line where it needs to be Medical Care this is one that gets all Sorts of headlines because you know There were a lot of people saying that It was deflationary I don't really know

You know I don't I don't really know I Don't really have any strong opinion on It but if you do look at at Medical Care Going all the way back to the 1970s this Is the first time that it's negative And again I know you know there's going To be all sorts of comments saying you Know there's no way that's true I'm just Going based off the data um I don't Really have a strong opinion on on you Know whether you know how accurate this This is or not but it does at least show That it is back down to relatively low Levels Recreation this is one that has been Elevated longer than some of the other Categories you can see back in September It was still at 4% whereas apparel back In in September was already at at 2% so Recreation is one of those ones that has Been lagging some of the other Categories but you can now see that it It had a pretty big drop right so I mean It was at 4% in September right around 4% then it dropped to 3% in October 3.2 Now it's at 2.5 so it's dropping quickly And if you look at a monthly change you Know the trend is is it was basically Wor it was a bigger drop this month than It was last month And maybe applying a three-month moving Average to it can show you that it's not Slowing down like that trend is not Slowing down just yet so that that's the

Hard part with all these all these Different categories that like some of Them seem to be already deflationary or Back to 1 to 2% other other other Categories are still relatively elevated And I think that's one of the reasons Why you're seeing different parts of the Economy get hit at different at Different times right like some parts Are getting hit you know early some Parts are getting hit later it it all It's all sector Specific education and communication This is an interesting one because you Know I I've only ever seen it gone Deflationary one time before and that Was back over here between 2016 and and 2018 and you can see that it actually Just printed um negative the last time It got close to this was back in October Of 2022 but it just printed a negative Print um this is a huge drop because This is from I mean it was at basically 0.9 to 1% for for a long time this is a Big drop to go from 0.9 to 1% all the Way down to netive 05 95% that's a Pretty big drop and will contribute to You know to um the the the lower Inflation numbers other goods and Services this is probably the other one Besides housing that is is really Struggling to come back down so just Other goods and services um if we scroll Down over here you can see that includes

Things like personal care products Household goods and services such as Le And financial advice by the way nothing In this video is financial advice but That's what this is covering and you can See that this one hasn't really come Down I mean it it didn't even top out Until November 22 and last month it was at 6.2% now It's at 5.65 it has come out a little Bit but I mean it's still closer to 6% Than it is 5% and it's still well above The 2% % Target well above it So how long will it take that one to Fall history shows us that when it falls It can drop very quickly look over here In fact over here it it it saw a big Drop actually in 2010 it was basically Up at 7 and a half% then a month later It was at 5% then a month later it was At 2% so when this one does drop it Could drop relatively quickly and and You might say well that's only because Of the you know the financial crisis There's other times two where it was Elevated like 9% and then it just Dropped down to 5% and then 3% right so This one can drop relatively quickly When it does finally go um more examples Over Here so we have all these different Examples but the one thing we have to Remind ourselves is that while we have These examples they do not they're not

All treated equally in terms of the CPI Calculation they don't just divide it Evenly up and say all right well they're Each going to contribute x amount Okay they're weighted differently and if You were to go look at the inflation Year-over-year contributions per Category so we're not just looking at The inflation per category we're looking At the contribution to the to the actual Metric let's see what we Get this is zooming all the way Out you can see what it looked like back Over here in the 70s and the 80s look at where we are today it's Getting pretty low right like it it is Like some of these sectors are getting Pretty low others are lagging now what's Fascinating to me is that if you hover If we just hover this here let me add on Headline onto the Chart look at headline inflation we just Said headline inflation is at 3.12% Right so you can see 3.12% so if you add All these other numbers up it should Theoretically come up to 3.12% food and beverages is contributing 04 of the 3.12 point4 and remember the reason why That I mean you can go look at Um inflation per Category look at food and Beverages and See where it is right it's at it's at Around

3% food and beverages consider is Contributing 4% of the 3% of the 3.12% but what do you notice on the Chart that's contributing the most it's Housing at it's contributing 2.31 of the 3.12 so most of the contribution to Headline inflation is just coming from The housing market which Remember shows lagged Effects if you look at Housing and we zoom Out it lags it takes a long time for it To come down Look over here let's compare it to food And beverages you can see that over here Food and beverages topped out In Um this Is how so food and beverages topped out In February of 74 housing did not top Out until December of 74 you see how Food and beverages continued to come Down and then finally housing came down Right so you look at it today and I say It's probably not going to be any Different right like housing will Probably follow the rest of these down And remember it's the one of the reasons Why the CPI is so high it's contributing Over two 2.31 of the 3.12 so that one is likely going to Continue to come down which is actually Why I think inflation should come

Down but I I I can't help but look at The 70s and remind myself that like There is a risk risk right like there is A risk that you get something like this Where it then re accelerates back up Right there there's always a risk of That happens look at 1976 you know you Can see food and beverages was all the Way back down here at like 1% and then At the time housing was still at like 6% And then everything just started to re Accelerate Again let's hope we avoid That there's still a long way to go in Terms of in terms of getting these Durably back down to Target right it's Still a long way to go so we'll see We'll see if they can if we if they can Stay the Course and then the other contributions I mean apparel is only 03 Transportation's 0.129 Medical Care is 01 recreation's .13 education as we mentioned it was Deflationary so it's actually negative On there and other goods and services is A 0.152 so again most of the Contributions are coming from the Housing sector and the food and Beverages in terms of how they're Weighted so those are probably the Categories that we should you know focus On to see you know where where Inflation's actually ultimately headed

We can also go look at core inflation um This one is actually still relatively Elevated at 4% and you know to be Completely honest there hasn't really Been a lot of progress on this in September I mean because in September it Was at 4.1% then last month it was at 4.02 now It's at 3.99 I mean it's not it hasn't Really been making a lot of progress Recently and I mean you can see that There's other times where It stopped making progress right like Here it stopped making progress around 3% and then ultimately it just went back Up here they stopped making progress on It at around 6% and then ultimately it Just went back up so you know we'll see If they can if they can actually make Progress on this or not if it starts to Curl back up then it likely meant that The FED didn't become restrictive enough It could mean if inflation starts to go Back up it either means that the fed's Cutting too soon or perhaps 5 and a half % isn't sufficiently restrictive I mean I think 5 a half% probably is but you Also have to hold it there for a long Enough period of time for it to have an Effect and if you hold it at 5 a half% And inflation starts to go back up then That would suggest that it's not Sufficiently restrictive there's no way To know I mean it's a theoretical idea

It's an abstract idea right that there Exists this R star when the FED funds Rate is above then theoretically the Economy contracts and If the Fed funds Rate is below then theoretically the Economy expands and there's all sorts of Different calculations as to what that Rstar is some people think that you know The the rstar the the neutral rate is is Higher than 5 and a half% some say it's At 4% or 3% and they were already well Into restrictive territory there's only One only one way to find out is to Basically see where we are in 6 to 12 Months and then we'll know more than Likely if it was sufficiently Restrictive so we'll see um you know We'll see about that if you look at the Monthly change on on core inflation and Let's just apply a a moving average to It it's generally been trending down Although again it has been a a Stochastic process so you can see a Series of lower highs and lower lows so Ideally ideally whatever comes next is a Lower high for core inflation Three-month moving average because we Really need it to to to drop quickly um Because I mean this is I mean it if it Just kind of hangs out here at 4% that's Where things can get very difficult for For small businesses if if look a lot of People are thinking cuts are coming next Year I I'm one of them I think they're

Probably going to have rate Cuts next Year but that goes out the window if Core inflation starts to go back up so Ideally in the coming months we'll see Core inflation drop a lot and and go Back to the 2% Target because otherwise You know otherwise some of these Businesses might just start to throw in The towel and say they can't they can't Survive higher rates for for any longer So it really is you know it really is Important that that inflation does come Down I think think we've covered what we Need to the only other thing I mean Again the FED funds rate expectations Right now are that the first cut doesn't Occur till May of 2024 and then again The only question is is that long enough By the way the average amount of time or Maybe the median let's say this Typically the FED pauses for eight Months before they start to cut okay I Think it's on average about eight months Of of pause before you before you then Come into into Cuts so if we to pull up Interest rates and look to see where They are right Now you can see that they they they hit The terminal the theoretical terminal Right here in July and then you have 1 Two 3 4 right so four data points it's Been four months since then um so if we Go another four out that puts you in March so on average the FED Cuts I think

Eight months after the termal rate is Hit so if that's true if they if they if This cycle represents the average which Most Cycles don't represent the average But if it were to represent the average It would mean the FED would start to cut In March even though the market thinks They're not going to cut till May but do Remember the average also includes Non-inflationary Cycles where the Reaction function of the FED might be Different right so it's possible that it Takes them longer to cut this time just Simply because they want to make sure Inflation is getting is is getting Durably back to Target if they cut too Soon then what happens right if they cut Too soon are we just going to go into Another year or two of an inflationary Wave I hope not I really hope not my own Opinion not that you asked right but my Own opinion which is often wrong um but My own opinion is that in six months It's more likely that inflation is going Down then going up right like so It's 6 months from today my expectation Would be that like core inflation is Lower than 4% right so like in in May of 2024 I would I would assume that core Inflation will be less than 4% that's my Assumption um I don't see rate Cuts you Know happening in December I don't see Rate Cuts happening in January it's possible that it happens in

March but I mean given given the Inflation reports doesn't seem to the Most likely um so I I would say there's Still a good chance that inflation does Continue to go down as long as they Don't cut too soon but I think we'll go Ahead and wrap it up well actually there Are there is the other ways we can Measure it there's the pce uh price Index that you can look at and this one Actually did drop a little bit here Right it it started to move up to you Know from 32 to 34 and now it's back Down to 3% so the pce arguably is what The FED cares about more um this Is uh the PPI all Commodities inflation Year-over-year that's actually negative Right negative 3.62% right now um and Then we have core pce price index Inflation year-over-year and that one is Also dropping right so it was at 3.8% And 3.65 now it's at 3.46 so that one is Moving in the right direction right like It is moving in the right direction Let's just hope it can continue to do That as we as we close uh the business Cycle out if you like the content make Sure you subscribe to the channel give The video a thumbs up and again check Out the sale on into the cryptoverse Premium and into the Crypt verse.com Links in the description below or the Pinned comment thank you guys for tuning In I'll see you next time bye


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