The Deeper Dive: Inflation is Perfectly Poised to Pop Back up!

Fighting inflation is a game of Whac-a-Mole.

You can buy the game here if you want, and I get paid, too, as well as on anything else you buy at Amazon today; but I really did just use this picture for fun. I just can’t use their picture without referring you to Amazon.

If we want to see where inflation is going—both the PPI measure on the producer side further up the pipeline and the CPI measure on the consumer side at the end of the pipeline—we need to look into the details that gave us those headline numbers this week that sounded like inflation has finally started to go back down again after rising during the first part of the year.

The headlines, of course, sounded great:

CNN — Price hikes slowed more than expected in July, and, for the first time in more than three years, the Consumer Price Index has landed below 3%. That paves the way for the Federal Reserve to cut rates next month after a yearslong battle with inflation

But let’s dig beneath the headlines.

CPI keeps on popping

As I wrote earlier this week, on a month-on-month basis, CPI actually went up, which means the most recent action was not downward like the headline YoY number indicated, but an upturn. If that continues, it won’t be long before enough monthly rises add up to a rise year-on-year.

The upturn was actually significant when you look at the measure of all items combined: Back in March, the monthly increase from February was 0.4%. In April, the rise in prices over March fell back to a 0.3% increase. In May, the monthly increase dropped to 0.0%, a significant improvement from any of the previous months; and in June, CPI actually turned negative overall at -0.1%, meaning we actually had overall DEflation that month.

Then came the latest report where everyone got excited over the YoY number, but what really happened in the short term was a fairly large upturn from DEflation at -0.1% in June back to INflation at +0.2% in July. So, what we really saw last month was an increase in consumer inflation equal in scale to the significant drop we saw in May.

As economist Wolf Richter put it,

On a month-to-month basis, the Consumer Price Index (CPI) and Core CPI accelerated in July. Inflation in core services, which accounts for 65% of total CPI, bounced back from the outlier and re-accelerated sharply; food prices ticked up; energy prices stopped dropping; and durable goods prices slowed their historic plunge, according to the Bureau of Labor Statistics today.

So, while the mainstream media and all the market pundits talked about the report for July like it was exactly what Powell needed to see, and even if Powell does see it that way, too, it really was the exact opposite of that. The brief improvements in lowering inflation that we had seen in some months on a monthly basis took a fairly significant turn against him all of a sudden.

If this proves to be the turn that I said we could expect to show up in inflation reports about now where we go back to rising inflation for the second time this year, then Powell’s soft landing will, at best, be on an airstrip riddled with potential wheel-popping chuckholes. Only another month or two of continuation in this direction could be enough to where the YoY numbers start to catch up.

This is why I wrote that the downturn in the YoY number does not really prove wrong what I wrote about the upturn in inflation that was coming. Once you dig deeper, as I do on Fridays, you find that many parts of the report actually showed inflation now starting to turn back up. This report actually turns out to be the very move I anticipated and largely for the reasons I gave regarding oil and housing.

Gasoline went from dropping in price 3.5% in May and falling another 3.7% in June to rising 0.9% in July, making that the biggest swing in the Gasoline price numbers anytime this year (whether measuring downswings or upswings). Fuel oil did the same thing but not as drastically, going from a drop of 0.4% in May and a larger drop of 2.4% in June to a rise of 0.9% in July. That, too, was the largest change of any month this year, other than January, and it was a swing to the worse. (January’s change was to the better.)

Housing, I already mentioned, put in a small change from the 0.2 rise that things had simmered down to in June to a 0.4% rise in July, but that put the monthly change in prices back to as high as any monthly change this year, other than January. It’s not a big change, but it could be the start of a continuing change, and it comes right when I expected it would, at the earliest, start to show up in inflation reports. We’ll have to see a couple more months to get a sense of whether it is change in trend or just a one-off.

So, things are actually moving along exactly as expected here in The Daily Doom, the black eye that I wrote about getting yesterday, upon deeper diagnosis, may just be theater paint if these upturns establish a rising trend. In the rest of this report, I’m going to look at the factors that convince me things will do exactly that.