This morning’s release of the Consumer Price Index (CPI) for October carries a simple message: Inflation is not dead…
It’s not even sickly…
The CPI shows that inflation ran at a 2.6% annualized rate in October – a pretty significant jump from September’s 2.4% inflation growth.
It actually gets worse because the so-called “core” inflation rate came in the same as September, at 3.3%.
Now the “core” inflation rate removes price data for food and energy because these categories are typically very volatile and don’t necessarily reflect the predominant macroeconomic trend.
For instance, like it or not, OPEC can push energy prices higher even as demand is weak. It makes some sense to offer a “core” number that ignores outside pressures on prices that are beyond the influence of the Fed or the economy at large.
But the thing about this CPI report is that it almost doesn’t matter whether you focus on the “core” or the regular one — they are both bad news.
Americans are most angry about grocery prices. Rightfully so…
Line items in the CPI report show gasoline and fuel oil prices fell 0.9% and 4.9% in October. Meat and egg prices fell 1.2%. Dairy prices rose 1% and veggie prices rose 0.4%.
You’d think that would weigh a little on the headline number, but again, it jumped from 2.4% in September to 2.6% in October…
Airline fares were a big culprit, up 3.2%. Unlike food, airfares can be avoided. Don’t like the price, don’t fly. (I had to pony up $660 for my daughter to fly from New Orleans to Richmond for our traditional Thanksgiving, but I’ll be driving, thanks all the same.)
The third biggest line item jump is one most of us can’t avoid: electricity prices up 1.2%…
You probably know exactly where I’m going with this.
Electricity demand from data centers that power AI is pushing prices higher. The hyperscalers we’ve talked about — Companies like Microsoft, Amazon, Meta, and Google will pay whatever they have to secure the power they need.
This is not a trend that is likely to reverse anytime soon. Hammer and I have brought several stocks that are benefiting from this electrification trend to your attention. And this message only becomes more important as inflation gets ready for its next rampage.
It is the investments you make now – the assets you own – that will give you the best chance at beating the next round of inflation.
A Favor from the Fed
The Federal Reserve Chairman Jerome Powell has made a few glaring mistakes during his tenure.
The biggest mistake was leaving the emergency COVID rate cuts in place long after the emergency was over.
Zero interest rates and massive fiscal stimulus to offset spiking job loss — there should have been little question about what was happening when inflation blew past the Fed’s target in May 2021 and hit 5% in June. But Powell called it “transitory” instead, and the ultimate 9.1% inflation reading is now his legacy.
So you might think I’d be ready to lambaste him for the jumbo 50 bps rate cut back on September 18…
But I’m not. In fact, I think he did us a favor with that 50-point rate cut and the 25-point cut he delivered last week.
The September cut came right on the heels of the unemployment rate spiking up to 4.3%. The Fed is supposed to act when data goes wonky. If Powell had just hiked rates immediately in 2021 when inflation took off, things would’ve gone better…
Unemployment data moved right back down after the September cut. But bond yields staged a massive rally. And yields have continued to rally since last week’s 25-point cut.
So how has Powell done us a favor? He’s let the bond market show us that inflation is making a comeback at the same time the stock market is making all-time highs.
In other words, he’s bought all of us some time to take some profits off the table while they are at all-time highs and redeploy them into assets that will rise in value when real-world inflation starts pushing higher.
I don’t know what more you could want from a Fed Chair.
It is time to take action.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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