Posted on 09/20/2022 8:43:38 AM PDT by SeekAndFind
Investors are running scared.
Chalk it up to the August CPI reading, which prompted a brutal sell-off on Wall Street last Tuesday. Stocks suffered their largest one-day drop in more than two years.
Why? The market took a “glass half empty” view of positive news: The headline inflation rate decreased from 8.5% in July to 8.3% in August.
As you can see, inflation has continued to trend downward since peaking in June:
Click to enlarge
Readers, this is good news. And it’s part of why our inflation nightmare could end within six months. Let me explain…
The CPI core rate is what really sent markets into a frenzy.
The core rate excludes volatile energy and food prices. It rose from 5.9% to 6.3% as rents jumped, along with other goods and services.
The Fed sees the CPI core rate as a major indicator of underlying trends. So, it&rsquorsquo;s no surprise the media obsess over it too. Maybe you’ve seen some of the alarmist, click-bait headlines. Same as it ever was, fear sells… but I’m not buying it.
Don’t get me wrong: The latest CPI report isn’t worry-free. And yes, the headline number of 8.3% year over year is still high. But overall, inflation is easing. That’s nothing to scoff at, even if it’s happening slower than consumers would like.
I always like to look under the hood, and there’s something a lot of people are missing. This missing link explains why, even though the core rate rose, inflation has in fact turned the corner.
Inflation will be flat within six months, and housing will play a pivotal role in taming it.
See, housing prices are a lagging indicator. Government inflation data uses historical prices to track housing, not current prices. So it takes time to see changes.
The CPI-U tracks prices of a few big chunks of daily life, like food, energy, and airline tickets. Those are all easy to calculate—it’s not hard to pinpoint the price of a dozen eggs or a gallon of gas.
Calculating the CPI-U’s housing component, or “shelter,” gets a little trickier. But it’s critical since it makes up a third of the index. That’s a huge chunk.
The CPI-U’s shelter data includes two numbers: rent and owners’ equivalent rent (OER). Rent is self-explanatory. It’s what renters currently pay each month based on their leases.
The other component, OER, is where things get dicey. That’s because OER is hypothetical. It involves homeowners’ estimates of what their houses would rent for.
The government tries to approximate this figure. And, as you may have guessed, its methods get a bit wonky. It pulls in a few factors such as rent, property values, and income to approximate this value. Basically, there’s a lot of guessing involved.
Meanwhile, one look at Zillow shows that home prices are indeed coming down.
We all know that home prices skyrocketed during the COVID mania. That’s easy to see when you look at the Zillow Home Value Index (ZHVI). The index rose an average of 19.6% year over year from August 2021 through July 2022. But the CPI-U’s shelter calculation only rose 4.5%, on average, during that same period.
Housing prices have started to cool based on the Zillow index, as you can see in the chart below. And compared to July 2022, home prices are basically flat. But the CPI-U’s August shelter reading is the highest it’s been since April 1986.
Click to enlarge
Simply put, the government’s housing data is based on old numbers. Inflation is cooling more than you think—it’s just not showing in the official data yet.
As inflation continues to ease, I’m confident the Fed will pump the brakes on interest rate hikes. After all, the whole point of hiking rates is to fight inflation. That pivot will help push stock prices back up.
Again, this is going to take some time. But I expect more accurate housing prices to make their way into the government data by early 2023.
My take: Inflation will be close to flat come next March. This will be a major shift that calms panicked investors and quiets recession fears. Once that happens, expect to see the next bull market kick into high gear.
Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.
Have my doubts but a easing of inflation would be welcome...
That rose-colored sunglasses "0% inflation in 6 months!" article is comical:
First, the author majored in "accounting," not economics. He likely took freshman "Intro to Econ 101" but that's probably about it. Second, that economics novice triumphantly declares he's "confident the Fed will" ... DING! DING! DING! ... (wrong answer). Third, given that novice author is so certain inflation will soon be 0% (far lower than the Fed's target), has that naive author ever considered the distinct possibility that the Fed will mindlessly overtighten and help senile Sleepy Joe cluelessly push our economy into a deep, long recession (or even worse, depression)?
Fourth, just like the clueless senile Sleepy Joe, that author actually says with a straight face that the latest high inflation report is good news. Apparently, both senile Sleepy Joe's handlers and that author actually believe that inflation averaging 7.25% (for the past 1 1/4 years) and more recently averaging 8.6% (for the past half year) is a good thing. Fifth, not even Nobel Prize-winning economists have a foggy clue what the economy will do in the next 6-9 months (let alone the next two years). Sixth, rental inflation is up to 14% in August. As mortgage rates soar (2.7% when senile Sleepy Joe took office, now over 6%) while home prices are already sky-high, more and more would-be home buyers are priced out of the market, so they'll have to rent instead, causing further rental rate increases (aka higher inflation).
Seventh, the senile Sleepy Joe puppet marionettes (handlers) continue lavishly throwing around tons of free government money. Does that uncontrolled Democrat/RINO wild spending tend to increase or decrease inflation?
I admit it's possible that inflation does magically plunge to 0% "in six months" as the author excitedly predicts. But I'm extremely doubtful that will happen. I also have a lot of doubts about the senile Sleepy Joe puppet as well - Sleepy Joe is just unbelievably lucky the Democrats/RINOs who are actually in charge decided to use a puppet (and hide him in his basement) as part of their election steal.
As inflation continues to ease,
i take it that means stops rising, but we are still gonna stay at 8%++
Sorry he is wrong the real rate is about 16.3% and will get worse not better. The Fed has to make a move and it will have to be a 100 basis point raise now. Congress could stop all excess spending but won’t, this will continue to add to the inflation rate.
Too many things factors that cannot be controlled. We are talking about several years of pain here, not 6 more months.
“Transitory...” /s
No it won’t.
Putin and Russia have pivoted away from the West and will concentrate on Eurasia , that is where the growth and the future is. They are no longer interested in what happens in the West. If you had bothered to read some of Putin’s speeches at various economic meetings since June you would see this.
The disintegration of the EU is happening as well as the Euro dropping along with the Pound. They have committed economic suicide and that will be pretty evident in a short time. Germany will have to allocate all resources to industry while people freeze at home to keep the economy going.
Somehow the “inflation is easing” meme was not registering on Wall Street today - Dow, S&P and Nasdaq have all three been testing/heading toward the lows of June.
“Flatline”?
Joe’s brain activity?
CPI? Does that mean Crack Pipe Investing in the author’s world.
That is a very tiny slice of time he is using to support his claim.
So, all I have to do is figure out a way to live with $4 gas and $5 bread and $7 milk for another 6 months - AT LEAST - and then, if things work out like this man HOPES, how much longer before prices start to drop as investors start partying again?!?
You know what, now that I think about it, I will continue to plan for my financial ruin at any moment, as long as Biden the Terrible is in charge of our government levers!!
Right about the time Congress stops printing trillions of Nancybucks.
Yep, good times are just around the corner. Keep the faith! /s
Strategic oil reserve will never run dry, keeps being filled with unicorn farts
Watch what happens after the election. It’s not just the rats, It’s the whole Uniparty cabal together with the multinationals. The WEF crowd.
I like to believe this but I am betting this guy is insane.
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