CPI stays hot, paves way for next Fed hike

and questions about TRQ

The annual inflation rate was released this morning and it came in at 8.2%. This is the third straight month of decreases in the inflation rate, but the rate of those decreases has slowed, dramatically.

Much of the slowdown can be attributed to the decline in energy prices and used cars.

The big story for the September CPI is the increase in the ‘core’ components. This is especially true of shelter costs. Rent costs soared one year ago and the shelter component of the CPI is really starting to show it. Shelter has really lagged what we are actual seeing on the ground by 6-8 months.

Rents really started to climb at the beginning of 2021 but we didn’t see a big change in the m/m shelter component until Sept/Oct of ‘21. Now we are seeing rents begin to soften but this won’t show up in the CPI until March or April of 2023. We see the same thing with food. Food prices have begun to rollover but for the CPI’s purposes, they are still rising.

Medical and transportation services, along with shelter kept the CPI high for September. As I had pointed at in the beginning of our inflationary run, there is no straight line higher. When some components cool off, others pick up steam. It is like a game of hot potato. This is really prevalent in the year-over-year heatmap.

Reader Questions

What’s going on with Turquoise Hill and how should I vote?

Turquoise Hill has been offered an all-cash deal to sell the business to Rio Tinto. Rio already owns 50.8% of TRQ so it would be very hard for this deal not to go through. Unfortunately for TRQ shareholders, this is a terrible deal.

If you flip through the prospectus that was mailed out, you’ll see that Rio is offering $43-CAD/share, this equates to approximately $31.26 USD. If you look further JPMorgan did an analysis of TRQ and came up with a book value of $48/share USD. My math puts it at $45/share USD. Either way, $31/share is a far cry from what the actual book value of the company is. Rio is getting a steal here. In addition, copper is just starting to get tight. TRQ has a lot of upside. In time, they could be valued well in excess of their book value.

Now Rio has said that if the shareholders vote no, they won’t initiate a hostile takeover but I have my doubts. From where I purchased the stock I’ll make some money but I’m certainly voting no on this merger.

If you are holding Turquoise Hill shares, you need to make up your own mind on this deal. I would advise you to read through the merger prospectus and consult a certified financial advisor.