CPI: Prices Will Remain Stubbornly High Unless Unemployment Increases
Not a lot to say about today’s CPI print other than prices will be stubborn at this level as we have previously written. Yes, the Fed has sharply increased its Fed Funds rate, but year-over-year Core CPI (3.9%) is not too far below Fed Funds and is in-line with the 10-year Treasury yield (4.06%). Thus, the real interest rate is essentially zero percent. This combined with the Fed’s modest QT campaign tells a story of a Fed that is not nearly as hawkish as the picture it paints.
Food: I don’t see food prices (food at home and away from home) abating without an uptick in unemployment. Have a glance at grocery store prices and restaurant menu prices as of late. Both are higher than several months ago and a year ago.
Healthcare and Insurance: I don’t see the price of healthcare services nor insurance (health, life, P&C) coming down regardless of the employment level.
Shelter: Shelter will be impacted as unemployment moves higher, but not before then.
Energy: Oil is the one CPI variable that could swing in either direction given downward pressure from the economy and upward pressure from a geo-political risk standpoint.
If the Biden Administration wanted to do a bit of damage control, it would be smart to reverse its hydrocarbon energy policy such that the Oil & Gas companies would have a significantly greater incentive to increase production. Getting automobile fuel down to $1/gallon would seem to be Biden’s best chance for reelection. Perhaps Biden plans to drain the SPR to zero barrels (see chart below the CPI table).
