Deflation Coming: CPI Supposedly Headed Nowhere, But Let's Dive Inside

-edited

The CPI did much of nothing but some are cheering the rise in apparel prices and rent. Let's investigate further.

This month the BLS Says the CPI Rose 0.1%.

The Fed's preferred way of looking at things (All Items Less Food and Energy) has been heading nowhere on a year-over-year basis for a long time.

The details are interesting.

CPI Weights and Percent Changes

Econoday Comments

Jerome Powell back in May was right, apparel prices were destined to recover which headlines a June consumer price report that will not be raising expectations any further for a rate cut at the month-end FOMC.

The jump in apparel will be getting the headlines but housing is the important key, rising 0.4 percent for rents (3.9 percent on the year) and up 0.3 percent for owners' equivalent rent (3.4 percent on the year). These are fundamental costs for the consumer and the tangible pressure provides a steady to rising floor for the core. Today's report points to an upward move for the Fed's preferred inflation gauge, the PCE core index to be posted at month-end (last at 1.6 percent). For those FOMC policy makers who aren't completely sold on a rate cut, the CPI will offer key talking points.

Talking Points

The Fed wants more inflation.

The average Joe, who has few assets (see Net Wealth Distribution: The Bottom 50% Have 1% of the Wealth) , is sick of it all.

The last thing Joe wants or needs is a jump in rent. Shelter is a whopping 33.2% of the entire CPI.

The worst part, for those seeking to buy a home, is the alleged year-over-year shelter index is a joke. It does not include home prices which are up over 7% from a year ago.

But hey, lets not count that. Houses are assets say the economists.

And let's also average out healthcare. Year-over-year medical care services, 6.9% of the CPI are supposedly up 2.8% on the year. Try explaining that to those not covered by a company plan, who have to buy their own insurance. The increase may be 50% or more.

Education

School is not in the above table, but it is in other tables.

College tuition, 1.6% of the CPI, is up 3.4% year-over-year. Elementary and high school tuition, 0.33% of the CPI, is up 4.1%.

Inflation Illusion

While the year-over-year numbers appear to be going nowhere.

The reported year-over-year rate of inflation is an optical illusion for anyone seeking to buy a home, anyone in a high rent district, anyone who buys their own medical insurance, and anyone in school or with kids in school.

But hey, let's average it all out, ignore housing prices, other asset prices, etc., and pray for more inflation, while paying 0% interest on savings.

Deflation Coming

In a foolish attempt to prevent routine CPI deflation, the Fed propagated bubbles in equities, junk bonds, and housing.

In doing so, the Fed planted the seeds of a very deflationary asset bubble bust.

Mike "Mish" Shedlock

Comments (29)
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Stuki
Stuki

"Shelter is a whopping 33.2% of the entire CPI."

All of which has to be paid for, one way or the other, by productive enterprise. For the sole purpose of keeping idle, useless, zero-to-negatove-value-add, deadweight leeches flush. Then add mandated "insurance," implied cost of ambulance chaser shakedowns, compliance with one arbitrary, pointless regulation or another, and ever rising taxes, fees and levies. Across all of productive economy....

And yet the well indoctrinated, pliable gullibles out there, are dumb enough to fall for the headfake that is is "The Chinese" and "The Mexicans" who are rendering productive American enterprise noncompetitive.........

thimk
thimk

open borders are a headwind for "affordable housing" . that cohort has to live somewhere .

jivefive99
jivefive99

The deflation thing only occurs if we continue to use the phony inflation calculations of the government. There is no way in heck you have all these property tax increases (48% over 4 years for me in Chicago) to pay for all the baby boomer government employee (underfunded) pensions without the costs being passed on somehow. The government doesnt include taxes in the inflation calculations since they assume the taxes will be passed along in other ways, like prices of products and services. You cant keep the lid on this for very long -- eventually all these taxes will be reflected in prices -- we cant all just absorb the losses and go out of business forever.

truthseeker
truthseeker

Since most people like to eat and use gasoline and electricity, I have never understood why they are left out of the inflation indexes as the volatility is really not that big a problem. Out in the Permian Basin in West Texas things have changed dramatically in the last 10 years. Since there r so many productive horizons, operators are putting big blocks of leases together to drill horizontal wells.For example, if you have say 20 feet of pay in the Wolfcamp formation, you can drill a horizontal well almost a mile long staying in your 20 feet of Wolfcamp the whole way. So now your productive zone is almost 5000 feet in a perfect situation. These wells are extremely expensive, maybe 8 million dollars to drill and complete IF you don’t have any problems. A normal vertical well is way cheaper to drill and complete but the horizontal well may come in making well over a thousand barrels a day so that it will pay out in a hurry that is until just n the last several years the price of crude has fallen dramatically, still ok yet we have another huge problem nobody anticipated when all this got started. Since it’s so profitable, we’ve developed a huge logistical problem as there are not enough pipelines or trucks to get all this new production to the market. So now we are having to pay say 8,10 barrels or more depending on how far your wells are from Cushing Oklahoma or down all the way to refineries on the gulf coast.

GeeWiz
GeeWiz

I remember all the "experts" warning of us crazy deflation after the 2008 bubble popping. CPI never went negative. Not at all. And for all the hysteria, CPI has only been negative yoy twice ... both times during the great depression.

As many commenters have pointed out, CPI doesn't include property tax hikes. It doesn't reflect the cost of health care or the cost of sending ones kids to college.

True energy costs aren't properly calculated. E90 and E85 are bad for gas mileage, and the ethanol destroys parts twice as fast. The liars at the BLS don't factor in those hedonic adjustments. Parts (and labor!) to repair the damage done by ethanol should be included in any proper calculation.

But here goes Mish on another rant about ISLM models or some other theory that disagrees with reality. And he will try to claim that the Fed manipulating rates lower is somehow "proof" of deflation, when its really just proof the Fed is driving yields down.

Try factoring in the real cost of living Mish. Your deflation story just doesn't hold up to real life

Nasty Edwin
Nasty Edwin

Deflation is unavoidable. Too much overall debt. There will be a cascading default on this impossible to pay promissory notes. Money printing to cause runaway inflation won't happen until the pain gets gut wrenching. The PTB to not want to print their wealth away into oblivion.

GeeWiz
GeeWiz

Don't bother trying to censor me Mish. Your deflation story is just plain wrong. When you get on a role with your Trump Derangement Syndrome or your deflation fantasies... its time for everyone to stop watching this blog for a while.

Fantasize by yourself

thimk
thimk

@GeeWiz there are 4 types on inflation:

1.) wage inflation 2.)consumer price inflation 3.) producer price inflation . 4.) asset price inflation.

the feds are striving for consumer price inflation with asset price inflation as the catalyst/side effect. i don't believe asset price inflation is part of their dual mandate. the author is talking about asset price deflation that occurs when bubbles pop. completely apolitical

Ted R
Ted R

I hate to sound like a broken record but I have been saying, for a long time, on this board that deflation was already here. Deflation has been in the U.S. economy for years now and it will be here for many years to come. Deflation causes falling demand and wealth destruction. Just wait until all this consumer and business debt comes tumbling down and well.... you'll see just what I have been talking about on Mish's blog.

MrGrumpy
MrGrumpy

When the 2008 bubble burst, real estate became a relative bargain. Note real housing prices were not included as such in CPI.
Investors with cash or good credit could pick up low priced real estate and hold it. Many did. However, the average wage earner was not in a position to speculate on real estate. Indeed, many were so under water they went bankrupt. So the rich got richer. And many banks got bailed out.
Do we expect anything different when the present bubble bursts?

JohnFromNE
JohnFromNE

Don't overlook the fastest rising component - "health insurance." The y/y increase is 13.7% as seen in the more detailed tables of the report. Although the calculation is not "out-of-pocket" like most of the other items it still points to an unsustainable expense. True, the weighting is not large but for retired seniors it takes up a very large part of their budget.

Cocoa
Cocoa

The auto market is collapsing but they refuse to lower prices. In fact, most demand is collapsing but prices are not moving much. For food, manufacturers decrease volume(clipping weight off cereal and boxes) while keeping prices the same. Everything is stuck-the FED keeps offering lower rates to keep the debt cycle going. Its all in a stall going into deflation

bradw2k
bradw2k

I wonder which government statistic is the most worthless: CPI, U3, or GDP.