Today, we got the March Consumer Price Index (CPI) report which showed an overall increase  of 3.5% unadjusted in the last year and 0.4% vs last month. That’s above last month’s 3.2% and  expectations of 3.4%. The 0.4% monthly increase annualizes to 4.9%. The Core CPI which  excludes food and energy was up 3.8% for the last year and up .4% from last month. The annual number was above expectations of 3.7%, and flat vs last month. The annual number is still almost double the Fed’s 2.0% target. Let’s go through the details: 

Food inflation came in at 2.2% which was a significant decrease from last month’s 3.2%. Food at home was up 1.2% which was below last month’s 2.2%. I write this every month, but I  continue to insist that anyone who believes that food inflation is only 2% hasn’t been inside a  grocery store in years. Food away from home is now up 4.2% which is slightly better than last  month’s 4.5%. 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. 

Last weekend, I saw some interesting analysis on Twitter/X where someone tracked the price  of the 50 most commonly-bought items at supermarkets. They determined that this basket was  up 8% annually for the past three years. I believe this number is much closer to the truth than  the CPI. It explains why so many people are angry about inflation and refuse to celebrate the great economy narrative being pushed by many in the media. When your grocery bill is up  almost 30% in three years, that’s going to create stress for most households. 

Energy has been the reason the CPI has come down so much in recent months (disinflation not  deflation). That trend was never going to be sustainable especially given the desire of many  western governments to limit hydrocarbon production. Energy prices have now reversed and  are rising again. Geopolitical conflict combined with extended production cuts by Saudi Arabia  and Russia have contributed to this trend. Total energy prices were up 2.1% with gasoline up  1.3% and fuel oil down 3.7%. These items had seen big decreases moderate to small decreases  in recent months. Partly due to the production cuts referenced above, we’ve gone from energy  being a tailwind for a lower CPI to a shift to a headwind. 

DKI hosted a webinar earlier this year with energy expert, Tracy Shuchart @chigrl, to discuss oil  and gas, uranium, and geopolitics. For those of you who want to understand this important part  of the economy better, please feel free to check out the full video here (not paywalled):  https://deepknowledgeinvesting.com/tracy-shuchart-and-gary-brode-on-energy/.  

New vehicle pricing was down 0.1% and used vehicle pricing was down 2.2%. 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 about half of the Covid-related spike in  used car prices has disappeared. Pricing is slowly returning towards the “normal” trend. It will  be interesting to see the effect of more manufacturers slowing the emphasis on money-losing  electric vehicles and returning their focus on profitable internal combustion cars and trucks. 

However, 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. 

In the fourth quarter of 2023, the market expected six rate cuts for a total of 1.5% with the first  cut coming in January or March. DKI disagreed strongly and said we’d get fewer cuts coming  much later. In recent weeks, market expectations had been reduced from six cuts to three  (.75%) with a 50/50 probability of the first cut coming in June. Again, DKI said those predictions  were too optimistic. Within minutes of today’s higher-than-expected CPI report, the market  erased predictions for the first rate cut coming in June and pushed that back to September. 

For those of you who are inclined towards political analysis, we remind you that changes in the fed funds rate act on a lag. That means that a potential September cut won’t be soon enough  for the stimulative effect to be felt in the economy before the November election. The White  House was hoping for help from the Fed. Instead, they’re going to get that help from a Congress  that stimulates the economy through overspending and a Treasury Department that’s  monetizing that extra debt. As has been the case for years, we’re all going to be paying for our  “stimmies”, government benefits, and other programs through future inflation. Powell knows  this even though he’s an experienced enough political operator to avoid saying so in public. 

The Fed had been succeeding in lowering the rate of inflation, but 0.4% for the month  annualizes to almost 5%. That’s not great and means it’s almost certain the Fed won’t reduce  the fed funds rate at the next meeting. DKI has been saying for more than a year that  Congressional overspending and monetization of that new debt will lead to a second round of  inflation and future Fed rate hikes. Expectations of a rate cut have been pushed back to  September based on recent high inflation data. We’ll see “higher for longer” unless Powell decides to panic and follow the lead of former Chairman, Burns, who authored the high inflation  of the 1970s by reducing the fed funds rate too early. 

DKI notes that this is true in the short-term. However, if the reason for higher rates is high  inflation/currency debasement, then that makes the long-term prospects for alternatives like Bitcoin, gold, and silver much better. If the dollar loses purchasing power each year, and harder  currency alternatives maintain purchasing power, then the dollar price of those alternatives  will increase. Even as I was in the process of writing this piece, silver and gold went from down  on the day to up, and Bitcoin has recovered most of its morning drop. I don’t think the hourly  chart of these instruments is predictive, but it is interesting to watch during high-impact events  like the monthly CPI announcement. 

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