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Inside Price Inflation – 3 out of 4 Continue On-Trend

CAMS Weekly View from the Corner – Week ending 10/14/2022

October 17, 2022

This past Thursday we had another go-around with price inflation data being refreshed via the monthly update from the Bureau of Labor Statistics.  The short of it is the trends continue to head in the wrong direction. While there are numerous measures of price inflation strewn throughout the economic landscape Thursday’s release consisted of some well recognized measures as well as some not so recognized which typically get little attention. A month ago we focused on a couple of not so recognized measures while today we’ll strive to bring them all together.  Unfortunately and perhaps not surprising three of the four measures under review continued with their established trends. Brief Background on the not so Recognized Measures The Federal Reserve Bank of Cleveland, which is the Fourth District bank within the Twelve District Federal Reserve System, has a long-standing take on price inflation via their two measures known as Median CPI and their 16 percent trimmed-mean CPI. Both the Median and 16% Trimmed measures are designed to go deeper into the broad economic storyline in order to identify what is taking place on the price inflation front that is not typically captured with the well known, input weighted Consumer Price Index (CPI.) By design this is an oversimplification of a more complicated process of measuring price inflation via the Median and 16% Trimmed.  The key to their value as a price inflation measure is they offer more than just the traditional select basket of goods and services that are given a certain weighting such as is the case with CPI. One process does not make the other better or worse but rather, in our view, consistently looking at the various measures together gives a more comprehensive analysis of what is taking place on the price inflation front.  We like comprehensiveness as it keeps us clear of being mentally swayed by headlines, mainstream summaries and assumptions.

Above we share an excerpt table from the Cleveland Federal Reserve’s inflation report.  We thought perhaps a month-by-month tabular type layout may give a clearer view on what has been taking place deep within the price inflation storyline.  Note from a trend perspective both continue to trend upward to higher highs with each passing month. 

% change past 12 months

Above we are sharing the same view only covering the more recognized CPI and also what is known as “Core CPI” which is CPI with food and energy costs taken out. The thought on extracting food and energy is to take out these headline type inputs which tend to be more volatile in order to focus on what is taking place inside the CPI price inflation basket. Note the trend of each with Core CPI continuing to post higher highs – i.e. keeping its uptrend intact. Bringing Them All Together As a general education note here the visuals shared within this edition have been sourced from the aforementioned Cleveland Federal Reserve Fourth District Bank.  If you are so inclined any of the links placed below the tables (above) and the chart (below) will take you to details for deeper study.

In the above chart we bring all four of the tabular price inflation measures together for a visual trend view via a traditional line chart. Our red horizontal arrow identifies the traditional CPI measure which is clearly holding steady at high levels.  In trend analysis this is known as a basing stage which is also known as sideways movement that is holding its range.  The question is will this break lower or higher in coming months?  Meanwhile our red circle highlights the fact that three of the four measures shared are putting in higher highs which defines an uptrend.  The unrelenting trend of these three does not bode well for an immediate drop (as many seem to expect) in the overall CPI (green line) measure. One thing is certain via this most recent price inflation data.  The Federal Reserve can be expected to continue to raise their benchmark Fed Funds interest rate in coming months as we round out 2022.  If this price inflation data continues with the above type of storyline as we round out the year then the surprise for many may be how much the Fed will need to continue raising as we move into the front part of 2023.  If that occurs the ensuing backdrop for the stock market will most likely continue to be difficult.  Price inflation is the story for markets across the board and this most recent update in the data is not encouraging when looking beyond the headline numbers. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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