The Consumer Price Index (CPI) was released this morning. It showed a reduction in the speed that inflation is eroding purchasing power. The annual inflation rate eased to 5.2% in August. This is down from June when it hit a 13-year high at 5.4%. This is also the first time that the CPI missed and came in below expectations since October.
This is the fourth straight month above 5%.
Looking at the “Core” CPI (that would be the CPI without the food or energy components), it came in at 4.0% year-over-year. This is also a decline from June’s reading of 4.5% which was the highest reading since September of 1991.
When I heard that the CPI underwhelmed Wall Street expectations, my reaction was to expect a big drop in the gold price. When inflation comes in low, what fear could there be to drive the gold price up? Instead gold is up today. This is because traders have swallowed the “transitory inflation” story hook, line, and sinker. The thinking goes, ‘now that inflation looks like it is coming back down, the Fed could be serious about tapering asset purchases’. There is a movement out of stocks and into gold and treasuries because money is looking for safety.
Bank of America puts together a great map of the CPI components and provides us with a detail of those that are getting hot and which are cooling off.
On a monthly basis, there were big declines in used cars, lodging away from home, and airfare. The big gainers were household furnishings, new vehicles, recreation commodities, and energy costs.
The annual picture looks very green.
We are seeing a cooling of the CPI components that had influenced its rise earlier in the year but now other components are heating up. One of the key components that hasn’t seen much of a rise is owners’ equivalent rent. This has been very low and is not reflective of the current environment in real estate. I expect this to begin its rise and will heavily influence both the headline CPI and the core CPI. Another component to keep an eye on is food. Like the owners’ equivalent rent, this is a heavily weighted component of the CPI. It is up quite a bit but I think it has more room to run. When these parts of the CPI start getting hot, the transitory story will begin to fall apart and investors will panic.
The time to take positions has come. We’ve got a slate of questionable bills coming before Congress. Also, there is going to be a giant fight over the debt ceiling. We continue to have record shortages and logistics issues. As all this goes on, wages continue their churn higher. These factors point to longer-term inflation. At some point, the high inflation statistics will set the herd into motion. Keep a lookout for opportunities to buy into gold, silver, and oil. Uranium, natural gas and coal are special situations that can also provide a chance for profit. I laid out my thesis on uranium back in June. I will put out my coal and natural gas thesis tomorrow.