Today, we got the September Consumer Price Index (CPI) report which showed an overall increase of 2.4% for the last year and 0.2% for the month. That’s slightly below last month’s 2.5% and above expectations by 0.1%. The 0.2% monthly increase was above the 0.1% expected. The Core CPI which excludes food and energy was up 3.3% vs last year and up 0.3% from last month. That 0.3% annualizes to 3.7%. Both of those were also above expectations by 0.1%. The annual number is trending towards the Fed’s 2.0% target, but the Core actually rose. Let’s go through the details:

Food inflation came in at 2.4%, down 0.1% from last month. Food at home was up 1.3% which was 0.8% below last month. Food away from home is now up 3.9% roughly the same as last couple of months. Anyone who’s seen the recent posts about bills of more than $20 for a burger, fries, and soft drink at fast food places won’t believe this number either. I write this every month, but I continue to be skeptical of this part of the CPI, and have been for the past two years. It seems understated to me (although slightly less than in the past couple of months). The one thing that might be closer to honest was the monthly change of 0.4% which annualizes to 4.9%. I still think that’s low.

Some people who I respect are saying that food prices really are up a small amount from last year and that consumers are still experiencing sticker shock based on the huge price increases we saw in 2022 and 2023. I acknowledge that may be a possible explanation, but either way, the official numbers show increases of 20% - 30% over just a few years, and many people I talk to are seeing multi-year price increases substantially higher than that. Whether the big move came in 2022, 2023, or is continuing now, both the rate of increase and price levels for food purchases are creating stress in many homes. Simply stated, even if food prices stop rising, the current level is too high for many families.

New vehicle pricing was down 1.3%, but up 0.2% vs last month. Used vehicle pricing was down 5.1%, but up 0.3% vs last month. These have been volatile categories. We’d also note that the decrease in used car pricing is off of a huge increase. Still, if you look at the chart below, you can see that after the enormous Covid-related run-up in used car prices, recent decreases have retraced more than half of the Covid-related price increases. Pricing is returning towards the “normal” trend.

Services prices were up 4.7%, slightly below last month and still too high. Services prices have been sticky, and this is an area where the Fed is struggling to bring down inflation. That is partly because much of the increase is caused by higher wages. The labor picture is difficult to analyze right now because the data being provided is inaccurate. Wages are up and the jobs reports show increases in employment along with decreases in available jobs (especially in the private sector). The jobs numbers have been consistently revised downward following positive initial announcements, and there have been multiple huge restatements of this data all showing fewer jobs than originally reported. This trend of inaccurate employment data with massive revisions is accelerating. More importantly, too many Americans are suffering real wage reductions where their raises aren’t keeping up with the inflation they’re experiencing.

All of the new jobs are part-time and almost all job growth is coming from government and health care which is largely funded by government. That’s telling you the public market is throwing money into the economy while private businesses aren’t doing as well. Finally, these figures are constantly revised downwards. We keep seeing positive initial reports while the historical numbers get adjusted by so much that the current month “beat” isn’t enough to show actual growth. Recent employment data has been weaker, but given the inaccuracies and inconsistencies in multiple data sets, and the constant huge revisions, it’s difficult to get a real handle on the labor market. As we’ve said before, there’s been no growth in full-time employment in years. That means the growth in jobs has been people taking on second and third part-time jobs. More people aren’t working. The same people are working more to make ends meet.

Shelter (a fancy word for housing) costs were up 4.9% and represents the largest category of the CPI. 75% of today’s CPI increase is due to just shelter and food, the two things that can’t be avoided. Housing prices have remained strong as people are reluctant to sell their homes and move when higher mortgage rates mean a new smaller home might have higher monthly payments. This has kept supply off the market and prices high. Right now, despite a decreasing CPI, home affordability is terrible for most Americans. There were expectations that the recent Federal Reserve rate cut would make mortgages cheaper, but instead, higher inflation expectations are raising the yield on both long-term Treasuries and mortgage rates.

The all-items CPI is down substantially as the Federal Reserve has done all it can to try to bring inflation under control. I think there are two areas of current and future issues. First, current inflation isn’t due to Federal Reserve policies; but rather, is due to massive overspending in Congress and the White House. This is a bipartisan problem and is not going to change no matter which party wins the November elections. While a recession could cause a brief bout of deflation, the long-term trend is likely to be inflation above the 2% target due to trillions of dollars of excess stimulus coming out of Washington.

Second, even if the CPI went to zero, there’s still the issue that current price levels for necessities like housing, cars, and food are too high for too many families. The current response out of Washington seems to be for more government subsidies and potentially, price controls. The first will lead to MORE inflation as the only way we can pay for more subsidies is to print more dollars. The second will lead to shortages and a black market with much higher prices. The only effective solution would be lowered government spending, something neither party favors.

Last month, the Federal Reserve debated cutting the fed funds rate by .25% or .50% and decided on the larger cut. DKI said this was an error. While we have recognized the weakness in the productive private economy for more than a year, excessive governmental stimulus has continued to bolster misleading GDP reports and create additional inflation. We’ve concluded that the Fed was making the same mistake that former Fed Chairman, Arthur Burns, made four decades ago when he relaxed the fed funds rate too soon. The result was the crushing inflation of the 1970s. 

The Core CPI just rose for the first time in more than a year, and almost all of today’s higher-than-expected CPI was related to food and shelter. You might be able to delay buying a new car and can definitely avoid buying a new television for a while, but it’s hard to avoid price increases for food and housing. The big reason the CPI has increased more slowly this year has been lower energy prices. Barring some big change in the next few weeks, energy prices will become a headwind for next month’s CPI report. It’s going to be a bad look for the Fed if the CPI spikes right after a rate cut.

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