Is INFLATION WATCH now back? NO! Things are still under control, like they've been for months.

I said in late 2023 that it’s become about time to cancel INFLATION WATCH, but we still should take a look at what the monthly CPI reports are saying. The report for January came out today, and so let’s give it a gander.

The consumer price index, a broad-based measure of the prices shoppers face for goods and services across the economy, increased 0.3% for the month, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.

Oh great, inflation is still muted. Wait, what’s that squawking I hear in the background.

Economists surveyed by Dow Jones had been looking for a monthly increase of 0.2% and an annual gain of 2.9%.

Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4% in January and was up 3.9% from a year ago, unchanged from December. The forecast had been for 0.3% and 3.7%, respectively.

It was that forecast by the “experts” that caused this new report to alarm Wall Streeters, leading to a selloff from what has been a multi-month rally largely based on the belief that inflation was done as an economic concern.

Dow tumbles 500 points, posts worst day since March 2023 after hot inflation report: Live updates https://t.co/6Y0ECMvty0

— CNBC (@CNBC) February 13, 2024

The Dow Jones Industrial Averag lost 524.63 points, or 1.35%, for its worst session since March 2023 on a percentage basis. It had earlier in the afternoon sunk more than 700 points, or 1.8%. The S&P 500 slid 1.37%, while the Nasdaq Composite fell 1.8%....

“This may well come as a easy excuse to take some of the froth out of the top of this market that’s been universally higher thus far this year,” said Art Hogan, chief market strategist at B. Riley Financial. “The CPI was, as reported today, just a touch hotter than expectations and proof positive that we’re not on a linear path, but we’re on a path headed lower.”

And I’d agree with Mr. Hogan on two fronts. Some of today’s selloff could be simple profit-taking after the S&P rose by more than 22% in just over 3 months in no small part due to interest-rate speculation. And I agree with Hogan’s point about staying in the right direction, as this paragraph from the CNBC rundown of the CPI report indicates that the higher inflation number comes largely from one sector as opposed to being system-wide.

Shelter prices, which comprise about one-third of the CPI weighting, accounted for much of the rise. The index for that category climbed 0.6% on the month, contributing more than two-thirds of the headline increase, the BLS said. On a 12-month basis, shelter rose 6%.

If you take out the shelter part of the CPI report, prices have only gone up by 1.5% in the last 12 months. And there also are a whole lot of homeowners like my wife and I that have fixed-rate 3% mortgages, and aren’t that affected by the higher shelter prices.

I know some might find that comment insensitive. I understand that higher shelter prices cause real economic pain for renters, and it’s one of the few legitimate drags on our economy these days. But isn’t that all the more reason to not be as concerned by this January CPI report, because in most areas of our lives, inflation is only running around 2-3%?

And if reports of rent prices leveling off are true, we’ll see that shelter number level off in the near future, as that stat notoriously lags reality. The Brookings Institute had a good rundown of this situation in a recent blog post.

This lag occurs for a few reasons. First, the market indices capture rents of units currently on the market, not rents for units occupied by continuing renters, like the CPI does. Rents change when leases expire, which typically happens annually. In addition, landlords may be less likely to raise rents to market prices for continuing tenants, and so it might take even longer for rents on all units to catch up with rents charged to new tenants. Second, because the BLS only examines rents every six months, it can’t know exactly when the rent changed. The BLS assumes that the rent increased gradually over the six months, meaning that only about one-sixth of the total observed increase in rent is attributed to the month the unit is sampled.1 For example, if the BLS observed that rent increased from $2,000 per month in January 2022 to $2,400 per month in July 2022—a 20% increase—it would assume that the increase in rent in July 2022 for that unit was 3%, roughly one-sixth of 20%. That means that an unusual increase in rents will only fully show through with a lag in the CPI.

In late 2022, researchers at the BLS and Cleveland Fed introduced an experimental quarterly index of new tenant rent (New Tenant Rent Index) using a very similar method to the Zillow index and data from the CPI Housing Survey. This index tracks market rents by only using observations in the CPI dataset that follow a change in tenant. The New Tenant Rent Index accounts for changes in the price of utilities, depreciation, and remodeling between tenants. Like the Zillow and CoreLogic indices, the New Tenant Rent Index will likely be a leading indicator for the shelter component of CPI.

Indicators of market rents, including Zillow, CoreLogic, and the New Tenant Rent Index, show that rent inflation for new tenants is at or below pre-pandemic levels, while CPI rent inflation remains elevated. This suggests that CPI rent inflation will decline over 2024 or 2025.

Ironically, we just got an inflation update 4 days ago that calmed a lot of Wall Streeter nerves, as it showed that the change in CPI for 2023 was….basically no different than we thought it was.

U.S. monthly consumer prices rose less than initially thought in December, but the overall inflation revisions were mixed, and did not shift expectations on the timing of an anticipated interest rate cut from the Federal Reserve this year.

The annual revisions published by the Labor Department on Friday also showed the consumer price index increasing slightly more than previously reported in October and November.

Prices excluding the volatile food and energy components were unrevised, after rounding, from October through December. All told, the revisions did not materially alter the path of inflation, which is moderating after surging in 2022. …

"The revisions were much ado about nothing," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. "This is becoming a trend where a Fed official mentions a data release once and then everyone waits with bated breath only to find out that it's a bunch of noise."

So if we start to see shelter drop in the next few CPI reports, and core CPI go down to 2-3%, why would the Federal Reserve keep its Fed Funds rate at 5.25-5.5%? Doesn’t add up, unless they’re in the bag for Trump/GOP, and want to turn a moderating housing market into a depressed one by the November elections.

In short, I am not going to worry about today’s CPI report showing 0.3% inflation for a month instead of 0.2% inflation. Especially since average hourly earnings went up by 0.6% in the same month, and have beaten inflation by 1.4% in the last 12 months (and 1.8% for non-supervisors).

Now if I start seeing a cutback in consumer spending or job growth take a significant downturn by March, then it’s time to worry. But there’s nothing I saw in the data today that warrants any fear for the future, at least for people that work real jobs and don’t spend time days blowing coke and trading paper.