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CPI Core hits the Fed's Target

Writer: InfraCap Management
InfraCap Management
2 days ago
2 min read

CPI headline inflation came out in line with expectations at .4% with core slightly hot at .29% vs. expectations of .21%. Importantly Y/Y core came in at only 2.4%, down .5% over the last 4 months and the last 4 months core rate annualized is only 2.1%. Higher than expected core was primarily driven by an inexplicable 1.6% (20% annualized) increase in the Education/Communications sector, a 2.7% (30% annualized) increase in airfares, and a 2.4% monthly increase in the volatile lodging sector.

 

PCE core has historically tracked .4% below CPI Core (see chart below).  Consequently, the current PCE core is  consistent with the Fed’s arbitrary 2% PCE target. PCE has recently blown out relative to CPI Core due to the mismeasurement of software which was estimated to increase by 22% by the BEA when software prices are actually declining.  Also, the BEA estimated that portfolio management added 21% to PCE Core Y/Y vs. market prices that are flat to down.   Finally, the BEA estimated that healthcare inflation was .8% higher than CPI did. Portfolio management added .5% to PCE core, software .3% and healthcare .2%. With these corrections, Core PCE Y/Y would be approximately 2.5% and in decline with the last 3 months annualized tracking at only 1.6%. 

 

It is also important to note that CPI Core includes airline fares which are solely determined by energy prices in the short term. Excluding this energy driven component CPI Core would fall to 2.15% Y/Y. Also, Shelter remains elevated Y/Y but has started to come down towards market prices. If one annualized the Ausgust CPI Shelter data, CPIcore Y/Y would be only 1.8%.  CPI Core using market prices for rent vs. the 2-year delayed CPI estimate is only 1.2% Y/Y (see infracapfunds.coms).

 

We recognize that the fatally flawed Fed will likely raise rates next week, but all of the data clearly supports either a hold or even a cut.   Fed policy is already ultra tight with the housing and construction sectors in recession and with hawkish Fedcommentary recently sharply contracting financial conditions causing the 30-year mortgage rate to top 7%.  This Fed is very focused on demonstrating its independence from the administration which has caused it to become ultra hawkish.  In addition, a majority of the Fed are Keynesians that believe inflation is caused by expectations vs. excessive growth in the money supply and oil prices.  Historical data demonstrate that inflation only comes from those two sources and that inflationary expectations are a dependent variable and not a cause of inflation.

 

If the Fed does increase rates next week, it will be a major policy error nearly as bad as its “transitory” theory of inflation developed in 2021. A Fed rate increase will have absolutely no impact on the current oil driven inflation and will significantly worsen the ongoing recession in housing and construction. If theWarsh task forces do not significantly reform the flawed Fed policy framework, the Congress should consider removing the Fed’s independence and putting theTreasury secretary in charge of monetary policy. 

 

 


 
 
 

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