Are you better off than you were a few years ago? What’s NOT in your wallet?

Stocks traded higher yesterday after headline inflation came in lower than expected. Continuing disinflation clears the path for a September rate cut.

Is this real, real, real, real love? Did you hear? Inflation is no longer a problem. Well, that is not exactly true. Let’s start with a rundown of yesterday’s number, and then I will let you in on a little, dirty secret. Be patient.

The Bureau of Labor Statistics reported yesterday that the Consumer Price Index / CPI rose by only +2.9% over the past year while economists were expecting +3.0%. What’s a 0.1% difference, really? Well, it’s kind of like a psychological thing. The Fed has its own self-made target of +2.0%. That number has been the kernel of our happy dreams for these past few years. We simply can’t move on until we achieve it. Oh, and restrictive interest rates will remain high until we get there as well. So, there are a lot of hopes tied up in that small number. Now that the Fed is talking a little less nasty about rate cuts, some stress has abated, but the markets are still very much focused on it. Therefore, it is like a little victory when we get a number with a 2 handle. The word “handle” is a Wall Street term that refers to the whole number of a price or index. If you are following me, inflation with a 2 handle means that we are almost, almost there. But where is there, really?

I have brought this up many times in my notes and even discussed it in a Fox Business News interview I had on Monday (A Nervous Wall Street Focuses On Inflation | FOX News Rundown). Inflation, as we know and discuss on the regular, is a rate of change. That is why, when I write it, I precede it with a sign (+/-) and follow it with a percent symbol (%). CPI is simply the year over year change of an index which measures the prices of a basket of goods comprised of what the Government perceives as things we mostly need and sometimes want. Breathe and push your glasses up your nose. Ready? Just because inflation goes down from +8% to +2% doesn’t necessarily mean that you are in good shape. The difference between +8% and +2%, -6% is referred to as dis-inflation. It means that prices are going up less rapidly than they were in the Summer of 2022 when growth topped out at almost +9%. Got it? You are still paying a lot more for that visit to the beauty salon than you were prior to the pandemic. Now that inflation has slowed, your beautician is not going to lower prices. No, they are simply going to go up more slowly than they were. Prices going down is called deflation. What do you think the chances of that happening are? EXACTLY.

With that under our belts, you may be wondering if we are better off now that inflation has slowed down? To answer that accurately, we have to take a step back and look at, not the growth of prices, but prices themselves. So, we need to look at the ACTUAL Consumer Price Index, the one I referred to earlier. Yesterday’s number itself was 314.50, which means nothing on its own, but in January of 2020 that number was 257.97. Because it is an index, it is simply adjusted each year based on price changes since its base year of 1983 when it was 100. SO, you are paying some +22% more for things than you were in 2020… and +214% more than 1983! Ok, forget about 1983, that was a lifetime ago, when I actually had to pay for a haircut. But that said you are paying +22% more for the things that you buy today versus just a few years ago. THAT NUMBER IS NOT LIKELY TO GO DOWN, but you hope that it will continue to grow at a more manageable pace. Technically less than the growth of your income. Check out the chart at the end of this section to see the actual index from September 2019 through current. Nope, you are not better off.

Ok, now inflation seems like it is on track to get to where the Fed wants it to go. Goods prices deflated, which means, that they are actually cheaper than they were last year, but services continued to go up, albeit at a slightly slower pace; they dis-inflated. Lately, most Fed members have shifted their talking points away from inflation to economic health, namely unemployment. They are rightly concerned that a continued rise in the unemployment rate could lead to a recession. It can, trust me. That means going forward, if we want to know just how much the Fed will be cutting rates by, say, yearend, we need to watch economic numbers, not inflation, really closely, putting most weight on employment numbers. Got it? You are on notice. Stop hating on your beautician and start paying attention to whether or not people will be able to attend the salon if they get laid off. On that note, don’t get crazy. Sure, the last Nonfarm Payrolls number was less than expected, but it still showed +114,000 new jobs created. In case you forgot, that number can be negative, meaning that the economy had net job losses. The new task for us, folks, is to monitor that carefully and hope that the number stays positive.

YESTERDAY’S MARKETS

NEXT UP

• Retail Sales (July) may have increased by +0.4% after coming in flat for June. This is a good measure of economic health. A high number might have been perceived as negative for stocks when inflation was the market’s obsession, now a higher number would indicate a healthy economy and a positive… unless it’s too high 😕.
• Initial Jobless Claims (Aug 10^th) is expected to come in at 235k, slightly higher than last week’s 233k. Don’t ignore this usually benign number, it moved markets last week.
• Industrial Production (July) is expected to have slipped by -0.3% after rising by +0.6% in the prior period. NBER, the guys and gals tasked with officially calling a recession, use this number as one of their considerations. It sounds boring but it can affect the markets.
• NAHB Housing Market Index (August) may have inched up to 43 from 42.
• This morning Tapestry and Deere beat on EPS and Revenues while Walmart missed on EPS with a Revenue beat. After the closing bell, we will hear from Applied Materials.