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 the Headline inflation numbers year over Year core CPI year over year and we're Also going to break down headline Inflation by the constituents of it sort Of figure out what in fact is holding it Up and finally we will look to see if This is going to have any material Impact on the terminal rate 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 into The crypto various premium at into the Cryptiverse.com let's go ahead and jump In so headline inflation came in today On the most recent CPI report at about 3.7 3.71 to be exact and the reason why this Might make some news headlines it well I Guess during the rate hiking cycle we Always get it in the news but it does Now Mark two consecutive months of Headline inflation sort of going in the Wrong direction right Now we speculated that this was likely Going to be a scenario for for inflation As a lot of the prior Tailwinds or sorry A lot of the prior headwinds for CPI are Now becoming Tailwinds when you look at Where they were a year ago and so it's Not really out of the realm of

Expectations that headline inflation is Remaining somewhat sticky around this Three to four percent level I would Argue that this was probably the most This was likely the most this was the Most likely outcome in my opinion and And my you know I still think we we will See headline inflation remain relatively Sticky here for another month or two but I actually I do anticipate it to Continue to come down because I expect The FED to continue on with what they Have said and that is to keep interest Rates higher for longer and to continue With their QT we can see that it's Having a material impact it just takes a Long time and again one of the mistakes That the FED made back in 70s was to Pivot back to QE too quickly And and which ultimately led to the the Resurgence of inflation my speculation Is that they're going to be less likely To do that this time and therefore while Headline inflation might remain sticky Around this level for a little bit it Should eventually come down Um and again right now we are looking at Headline inflation at 3.71 if we were to Take a look at the monthly change you Can see that last month it went up about 0.2 percent but this month it actually Went up about 0.4 percent month over Month so it's not really what the FED Wants to see but I also don't think it's

Sufficient to really change the fed's Mind on an interest rate hike in September so my guess and we'll check in With the markets here in a little bit my Guess is that the the bond market still Thinks that the FED will Um just sort of skip at the next meeting That's not to say that it has to be the Terminal rate although five and a half Percent could be but it's just to say They'll probably wait for more data and We'll wait for the next meeting to Figure out if they're actually going to Go to to 5.75 percent Now It's important to understand what is Causing inflation to sort of remain Elevated and so what we can do is we can Break it down by the components right so In in this case we're looking at at Headline inflation Um but we can break this down really by All the all the constituents right so we Can look at what is in fact holding it Up if we were to hide everything and Just sort of go through the list we can See that food and beverages continues to Come down right this is what we want to See you know no matter really where you Are sort of on the um you know your Views on the market Ideally inflation comes down you know so That it stops uh creating you know much Much higher prices that are going to

Make it very difficult for people to to Sort of live on so just from like a Practical perspective it is great to see Inflation coming back down another Reason why it's great to see inflation Coming down Is because they could theoretically lead To a more sustained uh economic Expansion phase if if we can get Inflation back down to lower levels as Long as it remains elevated then we're Going to have a you know a hawkish fed And they're going to continue on with QT Which could provide headwinds for for Risk assets that's not to say that you Know that some of them can't move higher It's just to say that at some point the FED might run the risk of over Tightening and and potentially kick us Into a a recession so food and beverages Is is still coming down and you know Looking at the month over month change There this last month has not been as Big of a decrease as some of the prior Months but it still is a decrease and I Think that's the important thing to look At here is that you know it is coming Down and that's what we want to see Now housing is one of the things that It's been that's been holding inflation Up uh for a long time and one of the Reasons is because it's very much a Lagging indicator right it takes a lot Longer for you know interest rate hikes

And all this other stuff sort of reach To the real estate market food and Beverages topped out in August of 2022 In terms of its sort of its peak Peak Inflation rate but housing didn't Actually Peak until January of 2023. so There's a there's a large lag effect on On this I expect this to continue coming Down now what's interesting with Headline inflation is if you look at the Monthly the the monthly change this last Month was actually a pretty decent drop I mean last month was only about a Negative 0.0595 percent drop but this one was Back to negative 0.213 which is a very Welcome site right we want to see these Things coming back down and and and so Far they are right so if you were to Look at housing uh inflation you know Over over over the years I mean you can See that it it sort of has its its Cycles and whatnot what we want to avoid Is something like this in in sort of the 70s where it got down to a level before Then going back up and one of the Reasons it went back up was just simply Because you know the FED kept sort of Pivoting back to QE far too soon And then it led to another wave of of Inflation and I know there's a lot of People that think we're going to emulate Something like this right where we just Keep putting in higher and higher Peaks

On inflation while that could be the Case I I cannot rule it out I would I Would argue that it's more likely that That this just simply comes back down I Mean I'm not not to say we can't have Another Peak later on but Um I I sort of suspect it it might Actually just be a lower high rather Than higher highs like we saw in the 1970s but we of course will follow this To see if the trend ultimately change Changes so far at least is moving in in The in the direction that we want to see If we look out apparel you can see that That has has come down uh slightly over The last month the monthly changes is Relatively small again you know the the Inflation year of year contribution from Apparel Is not very much right but it is it is At least a trend that that sort of Topped out in March of 2022 and and ever Since then it's been sort of been a Downtrend you sort of can see that Locally in 2023 it has maybe been going Sideways with a slightly bullish bias Almost Um so we'll keep a close eye on this one At least since April of 2023 it has been It has been seemingly slowly moving back Down if we were to continue we could Look at Transportation now Transportation the transportation sector Has actually been deflationary for

Several months Um you can see not including this Current month but for the last five Months Transportation was actually Deflationary in March in May in June and July this month it is actually back to Being inflationary although a relatively Small amount nothing to you know to be Concerned about at this point this is What Transportation sector looks like Sort of zoomed out you can see there's Plenty of periods here where it actually Does go Um deflationary okay so and and even It's gone deflationary in 2015 and 2016. Uh when we didn't even have a recession Right and also in in 98 and 99 uh when We when we did not yet have a recession And also in in 1986 my speculation is Again that the end of this business Cycle will likely result in a recession Once we get on the other side of of the Yield curve inversion so once the yield Curve becomes uninversion uninverted That's probably where the recession risk Materializes the most uh but at this Point Um you know it at least it's good to see The the inflation numbers coming coming Down for most of the categories even if Even if some of them are still slightly Elevated for medical care it actually Continued its deflationary uh Trend last Month you can see that it uh that that

Medical expense or medical care was down Negative 0.0415 now it's down negative 0.0769 the monthly change is is slightly Last that I was last month but it still Is trending in in a direction that that Brings down the overall inflation Numbers Recreation has has continued to drop Um and a monthly change would show that It's actually more significant of a drop Than we've seen since November of 2021. So pretty good drop there by Recreation And air inflation in the recreation Sector education and communication if we Sort of look at at you know just sort of What that one's doing you can see that It has dropped here in this most recent Month which is a welcome side especially After moving up in the most in in the Last month so we'll of course continue To watch that my expectation is that it Will slightly or it will continue to Slowly Trend down other goods and Services continues to Trend down as well So all in all you know we've sort of Gone through all the categories here Just sort of pulling up headline Inflation you can see that yes locally We have we are starting to move back up Some Uh which is is not necessarily what we Want to see but we also must remember That the path back down to two percent Is a stochastic path right it's not a

Linear path even if you were to look at At these other Trends sort of coming out Of these inflationary periods there were Periods where it shorter shorter time Frames where it spiked back up only for It to eventually come back down right And even over here coming out of the Inflationary period back in the 1980s What you'll notice is that this bottomed Out in June and then it topped out in September so a bottom in June and then a Top in September Uh You go to it today it bottomed in June And now we're we're potentially looking At a top in September right If that's the case it means that Headline inflation could actually once Again come in higher than the previous Month next month right but after that if It wants to follow this sort of this Disinflationary trend then by the time You get to October November December it Should be coming back down okay and and So that is again that is still my General expectation is that inflation Will Trend back down even though we're Currently in an inflationary sort of a Smaller inflationary impulse simply Because of some of the uh some of the Base effects became less favorable as we Got into Q3 but you know once we get out In the Q4 Cube one I imagine uh things Will sort of revert to the overall trend

Especially as as sectors like housing And those lagged effects really start to Take effect in the overall CPI numbers It's probably worthwhile to also go look At core inflation because while headline Inflation has gone up Core inflation continues to go down Which is a welcome site so last month Core inflation was at 4.7 percent this Month it's down you know considerably Right down to about 4.4 percent 4.39 to Be exact so it that's a pretty good move Here uh for for core inflation sort of See that when coming back down to that 4.3 to 4.4 percent level Um and and I imagine that that one will Likely continue to sort of come down and You'll probably get bounces occasionally In core inflation but my expectation is That when we look back on this period in A couple years I would generally expect It to Trend down with some occasional Bounces along the way the I think the Bigger issue is can the FED sort of stop It around this two percent level Eventually without sort of rebounding And going up before you get to two Percent or going well below two percent Because if you go well below two percent And you become deflationary rather than Just simply disinflationary then that Could also become a problem So our general expectations I mean going Into the meeting we saw that the odds of

A rate hike in in September were Relatively low only about seven percent So we can go check in on on what it is Right now we'll reload the page again it Looked like it was at about five percent Yeah I mean now it's a three percent so It seems like we're pretty much locked In for for the FED to sort of skip at The uh at the September meeting if they Were to raise at the September meeting I Imagine that would be a curveball for The markets so probably going to be a Skip at the next meeting that occurs Here on September 20th so that's exactly A week from today now what's more Important is not to look at what happens In September because I think we're more More than likely locked in for that Let's go see what happens out in November okay because that's probably What's you know what what is more Worthwhile to take a look at And you can see that in November markets Are expecting a 60 chance almost of of Of holding at five and a half percent Now when we first started this rate Hiking cycle I suggested that we could Go to at least that five to five and a Half percent level okay now we're at the Five and a half percent level and I find Myself in this position of thinking like Well this could be the terminal rate Right five and a half percent could be The terminal rate but with that said

It's always important to remain Open-minded about further tightening Especially if inflation remains sticky Okay so I imagine that the markets at This point still like to see core Inflation coming down and and perhaps The FED will will sort of view that as a Reason to continue to just hold it five And a half percent but if if core Inflation were to surprise to the upside Or if headline inflation were to Significantly surprise to the upside Next month then perhaps there would be Justification for another rate hike at This point I I honestly could see it going either Way Um five and a half percent I think is Likely sufficiently restrictive although If it is sufficiently restrictive it Needs to be held at that level for more Than just a couple of months right so Holding it at five and a half percent For two months and then going back down Is is likely not going to be Sufficiently restrictive however if on The other hand they just had it at five And a half percent and they kept it There for let's say a year then that Probably would be sufficiently Restricted sort of bring inflation back Down so it's not just about getting Inflation uh or it's not just about Getting the the FED funds rate to a

Certain level it's also about holding it At that level long enough for it to have A material impact and also recognizing That a lot of the rate hikes that Already occurred have potentially yet to Be filtered out to the economy so There's this potential lag effect that Are that are wide and and variable and It's hard to account for exactly how Much of that tightening has yet to hit The economy anyways so again that's one Of the reasons why I think the FED is Skipping is because that just gives the Prior rate hikes more time to sort of Filter through to the economy To figure out you know ultimately what Are the effects that those rate hikes Are going to have so you know if the FED Were to go to 5.75 or 6 soon then that Might not be giving the prior rate hikes Long enough to really you know have Their whatever their intended impact is Going to be so I think that's the reason Why the FED has been skipping but if Come November if if if in November the s P is is pushing to new highs and and Headline inflation is back above four Percent and core CPI is bouncing then Yeah like there's a good chance that They'll just simply raise again going to To 5.75 percent and um and maybe even Six percent is is possibility but you Know going back over I think a year and A half ago we suggested that the

Terminal rate could be around that five And a half percent level We Now find Ourselves there and currently that's What the market thinks is the terminal Rate we will see if ultimately that pans Out Or not if you guys 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 crypto various Premium at into the cryptiverse.com I Know it's called into the cryptiverse But we actually do have a lot of macro Charts as well including things on Inflation and if if you want we also do In fact have a free tier associated with Into the cryptoverse but you can Actually get a Weekly Newsletter as well As access to at least some of the charts That you see me talk about on on my YouTube channel we'll wrap it up there Thank you guys for tuning in and I'll See you next time bye