Common Cents & Lower Inflation?

This morning, the Bureau of Labor Statistics (BLS) released the “Consumer Price Index – October 2022,” better known as the CPI. This is the most widely used definition of inflation in the United States. Given the pinch higher prices have been putting on the consumer, the Street was very anxious about this report.

Would it be higher than estimated? If so, that could mean the Federal Reserve will have to be even more aggressive in raising the overnight rate. Would it be less? That could be a signal the Fed could cool its heels somewhat.

I won’t keep you in suspense any longer. The CPI increased 0.4% during October. Over the last 12-months, it has gone up 7.7% before seasonal adjustments. Ordinarily, those numbers would cause investors to go into apoplexy. However (drum roll, please), they were better than expected and much better than they had been.

Wall Street analysts predicted the numbers would be 0.6% and the trailing 12-month would be 7.9%. In September, they had been 0.4% and 8.2%. A spike in fuel oil was the reason why folks thought the monthly number would be a little hotter in October.

To say the markets loved the report would be an understatement. A colossal understatement. As I type this sentence at 9:36 CST on 11/10/2022, the S&P 500 up 145.85 points, or 3.89%. That more than makes up for yesterday’s loss, when investors weren’t thrilled with the increased inefficiency in our voting procedures. I will leave it at that.

Of course, a lot can change by the end of the day. However, we have been saying “all it will take” is some soft inflation data to get the jitters out of the markets. After all, that is what has had investors so spooked. This is because interest rates are little more than the price of money in the economy. Since people typically like to see their purchasing power increase, the cost of money goes up and down with inflation. At least that is the way it ideally works.

So, the CPI was a little less than expected in October? Interest rates should go down, making money less expensive. What is not to like, am I right? Fair enough.

We have all heard the expression “never look a gift horse in the mouth.” However, what would have happened had the Trojans done so? Think about that for a second. As such, it is wise to delve into the data a little, and not to focus too much on the “headline number.” Don’t get me wrong. I am happy for the rally, but what is the reality of the situation?

Let’s see, gasoline was up 4%. Food was up 0.6%, and “food at home” increased 0.4%. The shelter component of the report climbed 0.8%. Eggs? How does 10.1% grab you? Salad dressing up 4.1%. Meats, poultry, fish and eggs went up 0.6% in aggregate. The list goes on and on. Where the rubber meets the road, your monthly budget probably didn’t change much last month. In fact, you probably spent a good bit more on the so-called necessary stuff. That isn’t any fun.

Essentially, in this sense, the headline number was better than the reality. You could say the same thing about last week’s Employment Situation report. That makes the markets’ extreme reaction to the CPI report a little curious, doesn’t it? Yeah, yeah, yeah…inflation is trending downward. However, it is trending downward to 7.7% from 8.2%.

That is almost like saying you are only going to punch me in the face three times instead of five. Well, maybe that is a bit of a stretch.

Suffice it to say, your monthly budget probably hasn’t felt any real relief. However, there is another story embedded in the report, and it bodes well for your Christmas stocking. That is if you like getting stuff.

You see, just about everything else was down in price last month. Household furnishings and supplies fell 0.2%. Apparel dipped 0.7%. Transportation commodities less motor fuel sagged 0.9%. Education and communication commodities (which include computers, etc.) dropped 0.9%. Lump all finished goods into something called “Commodities less food and energy commodities,” and these prices swooned 0.4% during October.

This means, in aggregate, the worst of the supply chain problems is probably over for now. It also means retailers and wholesalers are sitting on a lot of inventory. Of course, consumers are probably buying less stuff than they were.

When taken together, businesses will probably be discounting like crazy after Thanksgiving. After all, they have to salvage something out of the holiday shopping season. Oh no, they won’t want to do it. Far from it. But once a major retailer, like Walmart, starts cutting prices, the dominos will start to fall. No one wants to sit on a bunch of inventory that they are now financing at 7% or higher.

I repeat, no one. Frankly, the sooner they can get stuff off the shelves, the better. Let’s go ahead and knock the upcoming “inventory correction” out as quickly as we possibly can. That would significantly mitigate the width, breadth, and depth of any subsequent recession.

Perhaps that is what investors read into this morning’s report. That we are much closer to the end of the problem than the start of it. That stockings will be filled with more stuff than anyone had previously imagined. That the consumer’s wallet will get a bit of a breather come Christmas. All of it.

Or perhaps folks just saw the headline number and jumped into the fray. After all, no one wants to miss out on a good stock market rally. Do they?

Yeah, that is probably it.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris
Chief Economist & Mental Gymnast


Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our  Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.