Physicians' Guide to Wealth

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Deciphering the CPI

Jul 13, 2022

Today the Bureau of Labor Statistics (BLS) released June’s Consumer Price index (CPI), a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. The CPI increased another 1.3% in June, following May’s increase of 1.0%. The year-over-year (YoY) increase is a whopping 9.1% and at an annualized inflation rate not seen since November 1981. That is certainly bad news for the Federal Reserve, which is determined to slow the CPI rise and, as expected, will most likely raise its discount rate at the next Committee meeting.

However, there is a lot of good news in this report and how the institutional investors responded.  
 
First, the CPI is heavily influenced by two key sectors that are energy and food. Energy has increased 41% in the past 12 months and was responsible for nearly 50% of the CPI monthly and annual gain. Gasoline prices increased 11.2% in June alone. Energy prices have a history of wild fluctuations in price. If the pendulum swings to one pricing side, expect a swing to the other. West Texas Crude futures experienced the wildest of swings in 2020 when they plummeted to -$40/barrel (yes, negative price per barrel as suppliers paid buyers to purchase their oil) that now should not be a surprise as prices swing to $100+/ barrel. At some time, oil supplies will recover, and oil prices will decline, which will have the opposite effect on the CPI of lowering the annual index increases. Last week, West Texas Crude dropped below $100/barrel for the first time since the Russian invasion of Ukraine and may be an indication that energy prices have peaked. 
 
Second is food, which was a major contributor to the CPI increase. Food is a more difficult commodity to manage prices with variables that include weather and energy prices to process and transport supplies. Rising food prices are not good for consumers who are directly impacted and will supplement rising budgets for food by reducing the purchase of discretionary items. Families and households have some options to mitigate rising food prices with smarter buying habits and menus. Another strategy implemented by everyone I know with some open areas on their property are planting vegetable gardens, and some are taking out grass areas (to save water) and replacing them with above-ground planting beds. These are admittedly small assistance to fast-rising food prices that will eventually slow, as history has proved. 
 
When removing just energy and food from the CPI, the annual increase is reduced to 5.9% that is still high but more manageable for households. However, there are other many commodities that are having significant impact on the CPI that consumers may buy once or avoid altogether until prices subside that include cars, apparel, and houses. By doing so, the real impact on households with the rise in CPI is minimized. Charlie Bilello outlined from the BLS report several of these commodities with the various gains in price for the past twelve months (probably none are a surprise to you): 
 
• Fuel Oil +98.5% 
• Gasoline +59.9% 
• Gas Utilities +38.4% 
• Electricity +13.7% 
• Food at home +12.2% 
• New Cars +11.4% 
• Transportation +8.8% 
• Food away from home +7.7% 
• Used Cars +7.1% 
• Shelter +5.6% 
• Apparel +5.2%
 
Finally, one key and very important observation is the muted response by institutional investors to today’s news. The DJIA opened down only 200 points and by mid-day had fully recovered into the positive It ended down for the day about where it opened. The point is that institutional investors may have fully priced in the current high CPI increases for 2022 and one or more Federal Reserve rate hikes.  

What Does This Mean to Me?

The stock market had a history of trading based on projected events 6 – 12 months in the future. Back in late December and January, when the stock market started to sell off, the stories of hyperinflation and rising interest rates were not common topics. However, true to form, six months later, the US economy is dealing with hyper-inflation and rising interest rates. Last week the stock market had three days the DJIA opened in the negative to end the day in the positive  The major indices have a positive past 30-day return, and first occurrence this yea, NASDAQ, the hardest hit index, has performed nearly a 100% better than the S&P 500 during these past 30 days and possibly an indication that technology will be the faster recovering sector once markets resume their upward trend.  

The potential for 2023 is dependent on the stabilizing of inflation and interest rates along with the average growth of corporate profit. Institutional investors are analyzing the prospects of 2023, and their favorable view will be revealed should the stock market start to recover by year-end. We maintain our long-term favorable view of the US economy and stock market.  In the first quarter, we increased our average cash allocation to most portfolios by 14% (almost 10X average allocation) and looked for technical confirmations in trading activity that the market has reached a bottom and establishing a new upward trend.  Give us a call or email us if you have any questions about this Brief or your account. We welcome the opportunity to be of service to you.

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