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“Why were stocks down 2% Tuesday?”
That’s what my buddy Johnny asked when I saw him at the coffee shop.
Inflation.
It’s back baby!
Higher inflation is bad for stocks.
The news spooked investors Tuesday – sparking the worst day for stocks in 10-months.
Things like CPI… inflation… the Fed’s… and the market reaction is confusing.
So, I’m going to make it simple 4 things you need to know.
1. “Official” Inflation Is Higher Than Expected
The Consumer Price Index – or CPI – is the official inflation measurement.
On Tuesday we got the CPI report for January.
It came in at 3.1%.
It’s lower than the 3.4% in December. And the lowest level since last June
Yet it was above the expected 2.9% level.
That was enough cause a selloff in the stock market.
2. There’s a Huge Problem with the Fed’s Math
CPI measures the price increases for…
Food, energy, cars, medical care, services and housing.
The cost of housing (aka “Shelter”) was the biggest contributor to inflation.
It’s responsible for 2/3 of the inflation in January – see the green on the chart.
Here’s the thing…
The CPI report shows that rents are up 6% in January.
Yet Fed’s calculation for Shelter lags the actual market for rent by up to 1-year.
Real-time data from Zillow shows rents up 3.4% in January. And ApartmentList shows -1%.
Not 6%.
This chart shows that “real-time” CPI is 2.2% – NOT 3.1%
The point is that CPI is trending toward 2%. And it’ll be at this level by June – as the Shelter data normalizes.
3. Why Stocks Hate Inflation
In November the Federal Reserve said they were done raising interest rates.
Stocks roared higher…
Expecting the Fed to cut rates in March.
However, higher inflation may cause Powell & Co. wait to cut.
Today the consensus is that the Fed will begin cutting rates in May.
4. Jerome Powell’s Next Mistake
Fed Chairman Jerome Powell’s legacy is at stake.
Losing the war on inflation would be horrible.
So, he’s likely to keep rates higher for longer.
This will be a huge mistake.
High rates are causing huge problems for small banks.
Commercial real estate faces a huge crisis. That’s due to vacant office buildings and high financing costs.
Cracks are already showing.
If the Fed waits for a crisis – it’ll be too late.
Jerome Powell must begin cutting rates to avoid a costly recession.
The time to act is at the March Fed meeting.
Stocks typically move sideways in February.
Ian