As we all know, inflation is the buzzword of the moment. However, November's CPI was only +.1%, which would be 1.2% inflation annually. The numbers have come down dramatically since June of 2022, which showed a month over month gain of 1.3%. In other terms, as of November 2022 data, the annualized rate has dropped to what the monthly rate was only five months prior – a 92% decrease.
What will December CPI show? We have inklings.
Retail gas prices, available here –
https://ycharts.com/indicators/us_gas_price
show that we are down about 13-14% from November.
https://www.wsj.com/market-data/commodities
Natural gas, crude oil, heating oil, and retail gas futures are all also down from November, variably so, but DOWN. An approximate 10-20% decrease across the board is apparent.
What else is dropping? Food commodities are also visible at the WSJ chart, corn and wheat, coffee, all are plunging – the only exceptions are cattle and sugar.
https://www.bls.gov/news.release/pdf/cpi.pdf
As we can see from the CPI inputs, we have data at our fingertips showing that most of the inputs are down A LOT from November. Groceries and eating out are stickier than the raw commodity prices so they will not match the futures exactly, but the trend is down. The car market is also f*cked. The only numbers we cannot get (unless someone can – would be great!) are for shelter and the other factors at the bottom of the chart, but with the recent revisions to the BLS job numbers (no growth!) and the stalled housing market I think rents are also probably stable at this point.
What does this mean?
Apparently the “trading economics” forecast for December CPI is +.2%. I disagree with this. Energy prices have been falling significantly since mid November, as have most commodity prices across the board. The rise in interest rates has already put us into recession IMO even if the numbers do not confirm this yet, and I believe fed policy is misguided as this entire fiasco was due to the supply chain issues generated by COVID and the invasion of Ukraine, NOT from loose monetary policy which was necessary to keep the economy afloat in the face of both crises.
In sum, I think the data we already have for December – barring something unforeseen at the end of the month – confirms that the next CPI print out will show DEFLATION. In fact, I would not be surprised if it was even -.5%. December 2021 CPI was +.6% (annualized +7.2%), if we are at 0% this month, inflation will have fallen by 100% year over year, and annualized CPI will drop to 6.5%. If we are -.5%, it will be down to 6%, a drop of 15.5% in one month!
The future is bleaker from there. The next print outs after Dec 21 were Jan 22 (+.6%), Feb 22 (+.8%), and March 22 (1.2%). April saw a relaxation (.3%), May went back up (+1%), and June was the peak (+1.3%).
If we assume 0% inflation through June 2023 – which I think may be GENEROUS given the energy numbers, the prohibitive interest rates, and the possible resolution of the Ukraine crisis and the continued amelioration of supply chain issues – off an annualized baseline of 6.5%, we would hit 5.9% in January, 5.1% in Feburary, 3.9% in March, 3.6% in April, 2.6% in May, and 1.3% in June. I.E., with values at zero and NOT negative, we are going to see today's annualized number become the actual annualized number as of 6/2023.
If December of 2022 comes in below 0 – i.e., -.5% as I think is quite possible given the energy plunge – things accelerate faster. Assuming we are at 6% annualized in Dec 2022 and the monthlies are -.3% through June 2023, we would be at 5.1% as of 1/22, 4% as of 2/22, 2.5% as of 3/22, 1.9% as of 4/22, +.6% as of 5/22, and -1% by June of 2022.
Barring another black swan event – which is possible, but could also result in even more deflation! – the trajectory since June of 2022 would put as at annualized inflation of under 2% between March and June of 2023, with a risk of actual annualized DEFLATION also appearing sometime after April 2022 if the December trends continue.
What does this mean? I think the Fed pivot will accelerate, I think we have one or, at most, two small hikes before the pause, and I also think that we will see rate CUTS by June of 2023. This likely portends a stock market bottom that has already occurred or will occur in Q1 of 2023, and if we see several consecutive negative CPI print outs, QE is likely back on the table by Q2-Q3 of 2023.
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