CPI inflation rate of 8.6% – what it means going forward

I’m nostalgic for the days when markets used to depend on Jerome Powell’s every word. To be honest, I’m nostalgic for green market days. Maybe I’ll be sitting on the couch in forty years, spinning tales to my grandkids about days when share prices used to go up.

Then again, this new monthly spin-the-wheel contest that is the CPI reading has become a lot of fun, even if it seemingly gets gorier and more predictable with every iteration, like a bad horror movie series (I saw Paranormal Activity 3 in the cinema, and distinctly remember people laughing when they were meant to be screaming in terror instead – now that’s a way to tell a bad movie).

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May CPI

May CPI came in hot this morning, hitting 8.6% against a forecasted 8.3%. Breaking the figure down, that’s a 1% rise from April.

Even when removing food and fuel prices, which are notoriously volatile, the core inflation number still rose 0.6%. That core inflation number is typically the one policymakers focus on, but no matter what way you swing it, this is yet another concerning number for authorities who had hoped that inflation would begin to cool.

Market Reaction

The large headline number – the biggest since 1981 – sent the market tumbling, with a lovely all-red colour greeting me when I checked my portfolio this morning. At least gold held up? Showing once again (if there was still even an iota a doubt) that Bitcoin has a ways to go before it can come close to claiming the title of a store-of-value.

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Politics

November is creeping closer, meaning midterm elections are squarely on the horizon and the Biden administration will not be happy with the continued decline in consumer sentiment that these inflation numbers are drawing.

In order to measure consumer sentiment, you could survey a million people, or dig deep into purchase patterns over the past months – you could even start a conversation with a thousand different taxi drivers about the state of the economy and record your answers. Given it’s Friday, I decided to do none of those things; instead, I whacked “recession” into the Google Trends database and lo and behold, it’s rocketing up like the price of my daily purchase of Greek yoghurt (at what point do I swap from blueberries to banana to save money?).

So yeah, Biden’s administration can’t be happy. There is a lot of partisanship and divide over American politics right now, but one thing that every voter will care about is their wallet, and almost everybody is feeling theirs getting lighter. Biden’s approval rating has dipped South of 40%, via the below data from Politico. For those unaware of what that means, it’s…bad.

How bad? Well, I trawled through political history to find quite how bad. Remember Donald Trump – the previous President of the United States with notoriously weak approval ratings? Biden is now less popular compared to Trump at this stage of the Presidency (507 days), as the green line on the below graph from FiveThirtyEight shows. Meanwhile, comparing to Obama at the same stage of his presidency is not even a fair fight. In fact, Biden is the least popular President at this stage of his term (507 days) than anyone since Gerald Ford back in 1974. Yikes.

What it Means

I wrote yesterday of my belief that we were largely over the Fed hikes/inflation narrative, asserting that the bulk of the bad news was priced in already. While my thought process remains from that article, i.e. I still think that oil is the key number to watch from a macro basis, the increased pressure the Fed and White House will be under following today’s CPI miss has unsurprisingly pulled the market down further.

But I don’t believe all that much has changed. The CPI metric undercooks inflation anyhow, the real number is significantly north of 8.6%. Either way, it’s yet another blow to the Fed’s failing attempts to get a grip on inflation, the White House’s popularity and Wall Street’s profit numbers. And they’re three of the most influential parties in the US.

Hey, I guess we could all just go and buy bonds instead, but where would the fun be in that?

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