"There is no way that this winter is ever going to end as long as this groundhog keeps seeing his shadow. I don't see any other way out. He's got to be stopped. And I have to stop him."
— Phil Connors, Groundhog Day
Friday Show-me Charts
Another month, another multi-decade high in the consumer price index. It’s starting to make me feel like Phil Connors in Groundhog Day:Wake up to the inflation news, watch the markets go down.
This morning’s data means we have at least another four weeks of bear markets to look forward to — until the groundhog comes out and has another look for his inflation shadow (next CPI release: July 13).
Markets are meant to be forward looking, so I’d usually expect equities to turn higher before inflation turns lower. But after so many confident predictions that CPI had peaked, we are now officially in the Missouri phase of the market: You’re going to have to show me.
Targeting inflation is sort of like targeting the groundhog — it isn’t the real problem, but the Fed can’t do anything about the real problems (deficit spending, war, ESG, nimby-ism). It can only do what it can do — which is kill the groundhog.
Powell is Phil Connors, and he’s going to drive the stock market off a cliff to kill Punxsutawney Phil.
How high is the cliff? It depends on how high inflation is.
Let’s get some charts to show us.
Inflation is trending harder than a meme stock in 2020.
Inflation tends to crash like a meme stock, too. But, in markets, being early is that same as being wrong and, so far, all the transitory predictions (mine included) have been too early.
Gasoline is pushing $5 per gallon:
That’s ~50% higher than a year ago. The summer driving trip you planned in lieu of flying somewhere will save less money than you think. Staycation, anyone?
Eating at home won’t save you much either:
Food at home prices were up 11.9% YoY in May.
Rent is up a comparatively modest 5.2%:
Counterintuitively, this may be the worst news. Rent is a lagging indicator — the data measures all rent, not just new rental agreements. Energy prices could mean revert at any moment, but the groundhog will be seeing rent inflation for many months to come.
There’s nothing modest about energy prices in Europe:
Natural gas prices are up ~500% YoY. Some of that energy-price inflation is being imported to the US as natural gas increasingly gets exported to Europe.
Here’s how it all adds up to 8.6%:
I have to think the red bar (energy) will reverse lower just on base effects alone. But the green bar (services) will keep rising due to the lagged effect of housing prices.
Regardless, that is a large cliff for Powell to drive us off of.
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