Today I’m addressing the January 2023 inflation report.
In fact, contrary to expectations, inflation increased last month.😬
Specifically, the Consumer Price Index (CPI) jumped 0.5% after increasing by only 0.1% in December.
In this episode, I’m answering these important questions:
- Why are prices increasing again?
- Was the report positive or negative?
- What does this mean for the long-term inflation trend?
We also have a special guest that drops by to share his thoughts.
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- BLS Inflation Report
- Michael Antonelli on Inflation Trend
- Cullen Roche:
January CPI Report: Why Inflation is Rising Again
Taylor Schulte: Welcome to the Stay Wealthy podcast! I’m your host Taylor Schulte and today I’m addressing the January inflation report.
In fact, as you might have seen, inflation ticked up last month.
Specifically, the Consumer Price Index rose 0.5% in January after only increasing 0.1% in December.
So, why are prices increasing again? Was the report positive or negative? What does this mean for the long-term inflation trend?
I’m answering these questions today and we even have a special guest that drops by to share a few of his thoughts.
For all the links and resources mentioned today, head over to youstaywealthy.com/180.
Inflation refers to the rise in prices. And it’s important to monitor because the higher prices rise, the more our purchasing power declines. In other words, it takes more of our dollars to buy that same gallon of milk or take that same vacation. As result, we consumers have to either earn more money or find a way to spend less.
Some inflation year over year is healthy and expected. But unexpected, skyrocketing inflation OR high, prolonged inflation can cause some serious economic harm. And that is precisely why the recent spike in inflation has been making headlines for the last couple of years. Everyone, including the Fed, is nervous about higher-than-average inflation and the damage it can do if it’s not contained.
I’ve covered inflation extensively on the podcast in recent years, but as a reminder, inflation reports (also known as CPI reports) come out monthly. CPI stands for Consumer Price Index and this index is measuring the MONTHLY change in prices for things that everyday consumers are purchasing. Food, energy, vehicles, shelter, etc.
If all of these things become more expensive month over month, the CPI report will conclude that inflation is on the rise. To be extra clear, when we see a spike in prices, it doesn’t mean that those prices will remain high, it just means they were higher last month than the month before. Sometimes prices jump up for a short period of time and sometimes those jumps are expected and predictable.
For example, energy prices rise during the summertime when demand increases.
So, the January report is out, and it shows that prices rose 0.5% last month, 0.4% higher than in December.
According to the report, which I’ll link to in today’s show notes, the two largest contributors to the rise in the Consumer Price Index were energy (i.e., electricity, gas) and shelter.
While prices were up month over month, the annual inflation rate actually dropped slightly year over year. From January 2022 to January 2023, inflation was 6.4%, slightly less than the 6.5% number that was reported from December 2021 to December 2022. So, the rate at which prices are increasing year over year is slightly lower as of January, a small but positive change.
In fact, 6.4% is the lowest annual inflation reading since October 2021. And if you stretch out the data even further, we see that the rate at which prices are increasing year over year is significantly lower today than a couple of years ago. For example, from June 2021 to June 2022, headline annual inflation was 9.1%.
So, if you see news headlines over the next few days screaming that inflation is on the rise, you might remind yourself of two things:
1. It’s normal for prices to increase every month and/or every year. As previously noted, some inflation is normal and expected.
2. For the last 12 months, from January 2022 to January 2023, the rate at which prices have risen is slightly lower than the last reading. And, over the last couple of years, the annual rate of inflation is in fact much lower. Depending on the news outlet and their motivations, they might not make that very clear.
And as you’ve likely picked up on, these numbers are backward-looking. These numbers tell us what happened last month or last year, not necessarily what will happen this month or this year. So, while the information can be interesting and potentially useful, it’s not intended to be predictive.
With that in mind, what do we make of the January report? What are some of the key takeaways?
To help provide some perspective, here’s my good friend Cullen Roche, author of the Pragmatic Capitalism blog and founder of Discipline Funds, with his thoughts:
Cullen Roche: We’re seeing progress in the right direction with this report. But it’s still moving at a pace that’s uncomfortably slow. Prices are proving stickier than expected. But the good news is that a lot of the underlying data remains lagging, with housing in particular.
Owner’s equivalent rent, the CPI’s shelter measure, contributed 7.8% year over year. That’s far too high, and this data notoriously lags. Real-time housing and rent measures show substantially more moderation in prices, so this bodes well for lower inflation into the back half of the year. When the CPI’s shelter measure component catches up.
All in all, this inflation report was unsurprising, but it confirms what the Fed has already communicated. They’re likely to move rates to 5% on the overnight rate and hold for the remainder of the year.
There’s good news and bad news in that. The good news is that treasury builds and cash will generate pretty good returns for the remainder of the year. The bad news is that if you’re looking to borrow for a car or a house, then expect higher interest rates to linger for longer.
Taylor Schulte: Let me summarize some of the key points Cullen brought up:
First, month-over-month inflation was slightly higher than expected. However, year over year, the rate at which prices are rising has decreased slightly. And while the annual inflation rate is trending in the right direction, it’s not happening as fast as the Fed would like to see.
Cullen also reiterated that shelter was one of the largest contributors to the uptick in prices last month. However, he shared that shelter data typically lags. I.e., the shelter data in the CPI report isn’t a good representation of the current state of housing.
Real-time data shows that housing and rent prices are in fact slowing down. So, his theory is that when shelter data catches up, we will likely see lower inflation numbers get reported later this year.
The good news is that cash and treasury bills will continue to pay meaningful interest rates. The bad news is that the cost of borrowing will likely remain higher for longer.
In summary, our current reality is likely more positive than the January CPI report and/or some of the headlines floating around might suggest. Inflation is cooling, just not as fast as the Fed would like to see.
On that note, Michael Antonelli, a market strategist at Baird, reminded us on Twitter yesterday that the rate of inflation doesn’t typically go down in a straight line. In similar economic situations in the past, where inflation was higher than normal and efforts were made to slow it down, he points out that month-over-month prices have historically jumped up and down while the overall trend remained in decline.
In other words, a single monthly inflation report showing a larger-than-expected uptick in prices isn’t necessarily uncommon and should likely be expected.
Lastly, one component that I’ve touched on before but haven’t mentioned yet today is the labor market. Believe it or not, employers added more than 500,000 jobs in January alone and hourly wages have grown significantly in recent months.
In other words, consumers still have jobs and healthy wages and therefore continue to spend even in the face of higher prices. And that is precisely why the Fed continues to maintain higher rates and will likely hike them again. Higher rates make borrowing more costly, specifically home mortgages. Since real estate IS the economy, a slowdown in housing due to prolonged higher borrowing costs will likely begin to curb consumer spending to the degree the Fed is looking for.
It’s refreshing to see some positive data points but, unfortunately, we’re likely in for another 6-9 months of uncertainty with regard to the Fed and inflation.
Once again, to grab the links and resources mentioned in today’s episode, just head over to youstaywealthy.com/180.
Thank you, as always, for listening and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.