The Consumer Price Index (CPI) for the month of July was released today by the US Bureau of Labor Statistics. Even though it is not the Fed’s preferred method of looking at inflation, it still plays an important role. Many analysts and traders have been sitting on pins and needles for every inflation indicator’s release, including the CPI.
Below is the month-over-month look courtesy of the Fed.
You can see that the CPI has slowed in growth on a month-over-month basis from 0.9% to 0.5%. This seems like a dramatic shift lower. I, however, have my doubts. Firstly, 0.5% on an annualized basis is 6.0%! That means if this pace were to stay steady through the next 12 months, we would triple the Fed’s supposed mandate. Secondly, the indexes for shelter, food, energy, and new vehicles all increased in July. Here is the index’s heatmap, courtesy of Bank of America:
As we can see, of the 24 components that make up the index, all but 2 are continuing their march higher. My argument would be that we are making the transition from transitory inflation to perpetual inflation. A few of the components that I see this happening in are food, energy, new vehicles, shelter, and medical care. Consistent rises in these components would signal to me that the transitory thesis is fading and that we are facing longer term inflationary pressures. I am unconcerned with transportation services, used car prices, and lodging away from home declining. I already feel that used car prices have reached obscene levels and need a breather. In addition, it seems that the shelter factor continues to be well below my experiences in the housing market.
Putting it all together, the CPI is up 5.3% on a year-over-year basis. Some factors influencing the index are rising slower than previously, while others are picking up steam. ‘Owners’ Equivalent Rents’ and ‘Rent of Primary Residences’ are below expectations when looking at the broader housing market. In a sense, I feel we are having a “changing of the guard moment”. The old guard, those components that were hot in the beginning, are cooling off. Meanwhile, components that started cool are beginning to run hot.
For silver, oil, and gold, this all means nothing unless it is recognized by the herd for what it is. That is; long-term higher inflation. The herd has been lulled to sleep by the transitory song of the Fed. The Fed has aided this effort by keeping the screws to the hard commodities. For me, I see that food component heating up on the heatmap and I know the place to be is those soft commodities such as CORN, SOYB, WEAT, and DBA. There are, of course, derivatives of this theme which could include producers such as Tyson Foods (TSN), Hormel Foods (HRL), and Conagra (CAG).