The BLS published CPI numbers for July . PCE, the Fed’s preferred measure of inflation, won’t be published until August 30. Here are my projections through September.
Chart Notes
- CPI is the consumer price index. Monthly reports are from the Bureau of Labor Statistics (BLS), the same organization that posts the monthly jobs reports.
- PCE is the Personal Consumption Expenditures price index not to be confused with PCE spending. The latter is in dollars. PCE reports are from the Bureau of Economic Analysis (BEA), the same organization that posts the quarterly GDP reports.
CPI Measurements
The CPI measures prices of items directly paid by consumers. Shelter has the biggest weight at 36.315 percent of the entire index.
Home prices are not in the CPI, just rent and Owners’ Equivalent Rent (OER). OER is the price a homeowner would pay to rent if they rented instead of owned.
PCE Measurements
The PCE contains items directly paid by consumers but also expenses paid on behalf of consumers. Medical care is the best example. The PCE measures prices of individual policies as well as corporate health policies and Medicare.
CPI vs PCE
Neither measures home prices directly. Both measures are flawed. Inflation matters, not just consumer inflation. The Fed has not figured this out.
As a result of the difference in measurements and weights, Rent has a bigger impact on the CPI compared to PCE, and PCE overweighs health care vs the CPI.
The biggest factor in estimating year-over-year changes is what happened to the month-over-month change a year ago.
Investopedia notes “Prior PCE figures are subject to revision every year. That can result in different measurements over extended periods. Some observers feel that this reflects the inability to value personal consumption expenditures accurately.”
Month-Over-Month Change a Year Ago
- CPI July: 0.2 Percent
- CPI August: 0.5 Percent
- CPI September: 0.4 Percent
- PCE July: 0.1 Percent
- PCE August: 0.4 Percent
- PCE September: 0.4 Percent
August and September numbers will be east to beat. If the CPI and PCE numbers are better than what happened a year ago, the year-over-year number will drop.
July is a difficult number (0.1) to beat for the PCE. Nonetheless, I projected a year-over-year decline anyway. To understand why, let’s dive into the latest CPI report.
Consumer Price Index a Tad Better than Expected Year-Over-Year
On August 14, I commented Consumer Price Index a Tad Better than Expected Year-Over-Year
Shelter Was Hot
The largest component in the CPI is Owners’ Equivalent Rent (OER) with a weight of 26.76 percent. OER is the price homeowners would pay to rent their own home if the rented instead of owned.
Rent of Primary Residence is another 7.64 percent, and the broader Shelter category is a huge 36.32 percent of the CPI.
Shelter rose 0.4 percent as did OER. Yet, the CPI was only up 0.2 percent.
Good News on the Medical Front
Medical care services, with a weight of 6.51 percent in the CPI, declined 0.3 percent in July.
Medical care commodities, with a CPI weight of 1.48 percent, rose 0.2 percent.
Given the PCE overweighs medical care and underweights rent relative to the CPI, I expect a small improvement on the year-over-year PCE price index despite a tough year-over-year comparison.
On August 13, I commented Expect Good to Very Good CPI Reports for July, August, and September
I estimated a year-over-year decline of 0.1 percent to 2.9 percent and that is what happened despite hot shelter components.
Today I am forecasting the PCE and CPI through September.
Based on the shelter component running hot, I upped my CPI forecast numbers by 0.1 percentage points for August and September.
Caution to Treasury Shorts
The easy year-over-year comparisons will allow the Fed to cut faster than many will think it should.
And if rent starts posting month-over-months gains of 0.2 percent or less, we could easily see the year-over-year CPI dip below 2.0 percent in the September report (posted in October).
I would not advise shorting long-dated US Treasuries here.
Recession Underway
I believe we are in recession and the recession will strengthen. Politically speaking, Recessions always hurt the incumbent party.
July 25, 2024: “All Hell Breaks Loose” In the Next Few Months as Recession Bites
August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions
August 2: 2024: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered
August 15, 2024: Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions
Wrong. Now that Kamala Harris has threatened federal price controls, all businesses are going to try and “get ahead” of these caps before the next fiscal year. I’ve already seen it. Listed rent prices have spiked on Apartments.com (almost 6%) in my area compared to the price before Kamala’s announcement less than two weeks ago..
Rising inflation is baked in within the next eight months if the Fed cuts rate in September. No room for discussion, guaranteed.
M*Vt = P*T
Long-term money flows drop from here. But then they reverse.
The defeat of Hamas in Jasa and the defeat of the pro Palestinian protest in Chicago might end the dreams of three whore states.
Rent and mortgages are paid monthly. They are personal expenditures. RE transactions are relatively rare, rarer than new tenants sign new leases. C/S is a fake positively biased, but OER northeast + OER midwest + OER south plus OER west are faker. The real CPI is either smaller or negative.
If you look at RE purely as an asset, then the change in the cost to purchase a house should probably not be in the CPI, else why not stonks?
In any event, these indices do not really measure consumer well-being. Imagine you are teleported from your comfortable bath of 95 degrees F to a bath of molten metal of 1,000 degrees F. A 2% increase in temperature per year after that really doesn’t matter.
Great info, great analysis
Thank you.
An AI Takeover (Not)
There is now a widespread belief that AI will inevitably surpass us in terms of intelligence, eventually causing the destruction of humanity… But can such things happen in reality, or is this just another myth we tell ourselves?
https://thehonestsorcerer.substack.com/p/an-ai-takeover-not
“There is now a widespread belief that AI will inevitably surpass us in terms of intelligence,…”
Considering AI is still a millennium away from catching up with fruit flies, that should tell you something about the “intelligence” of the Fed enriched and enabled leeching classes currently attempted passed off as “authorities” on anything other than idly receiving loot The Fed stole from their in-all-ways betters.
The Ministry of Truth will continue to provide statistics that support whatever policies the Centrally Planned Economy desires
Of course energy could be the wildcard if the crazies in the Middle East start a full scale war which could happen any day now. That will be hugely inflationary and hard on liquid asset values as well other than MIC stocks
Investors focus on month over month and year over year change. But that is why there is a disconnect between wall street and main street. While the rate of change is coming down, i flation is not. It is just increasing at a slower rate. So when politicians say the economy is better than consumets think it is, they are the ones oit of touch with reality. I guarantee you that most politicians believe that prices consumers pay should come down as inflation starts coming in range of 2% – hence the price gauging (sic) and price controls being thrown out there.
Need to kill the commodity complex by banning derivatives trading. It will kill a lot of banks and hedge funds but this is necessary to kill high commodity prices which drive up the price of everything. Supply and demand are distorted by derivatives trades.
My household premium for medical insurance is over $15000/yr. What does PCE say? $6000?
That’s why it’s an average. Some like you are way over and others will be way under.
Neighbors of ours are both lawyers pulling in excellent money and both self insure. As in they pay 0 monthly and pay cash as needed. The husband recently crashed his motorbike leading to broken collar bone and leg. He paid 800 cash for the leg cast even though it would have been billed as thousands to insurance. He’s currently negotiating the ambulance ride (they want 800 he wants to pay at most 400) and other services he needed like Xrays etc
I am on Medicare advantage and am healthy. Those like me lower the average.
It’s all peaches and roses three months before an election.
I think the majority of people that pay attention are expecting our overlords to promote “good vibrations” for the #Brat joyful warriors and continue to cook the books.
They’re not price controls; they’re Price Controls of Joy.
There’s a reason why the govt uses just one quarter of data to calculate SS COLA.
And there’s a reason that the quarter chosen was the third.
Because over a long period, going back decades, it returns the lowest CPI than any other quarter.
So not only have they totally changed the way CPI is calculated so it is always far lower than reality. They also use the lowest quarter to determine SS.
They are all criminals.
My 2 cents:
1) Naw … it’s full year. Q3-to-Q3.
https://www.ssa.gov/cola/
Am I mistaken?
2) Gonna be a fun DNC next week. I enjoyed movie Trial of Chicago 7 … good timing to watch it if you haven’t.
Agreed. And, it kind of lines up with the sell in May and go away saying with investing. It’s all been downhill for COLAs since 1983.
No doubt, “adjusted” numbers.
:”seasoned”