Since peaking at +2.9% in July, U.S. consumer inflation is now sitting at the lowest level in the last 18 months, notes Landon Whaley.
Headline risks are everywhere, much like overpriced fixed menus at restaurants on Valentine’s Day. There is never a shortage of “Headline Risk” candidates as the media and the Old Institution remain hell-bent on misinforming the masses. Bloomberg’s coverage of last week’s release of the January inflation report was classic Old Institution.
I’ll start with the headline: “U.S. Inflation Remains Contained Amid Fed Patience on Rates,” and move on to the two key takeaways they chose to highlight: “Monthly gain in core index matches estimates …” and “Annual rises in headline, core slightly faster than forecast.”
To begin, there is nothing less important about a data point than how it compares to a Wall Street full of economists’ forecasts. The only thing that comparison tells you is how wrong the forecasts were and by how much.
But Bloomberg was just getting started, because the article goes on to say that “the broader (Consumer Price Index) was unchanged from December …”
What are these guys looking at?! The data-dependent reality is that U.S. consumer inflation slowed yet again to a +1.6% annual pace. January marked the third consecutive monthly slowdown and the fifth month of deflation in the last six.
Since peaking at +2.9% in July, U.S. consumer inflation is now sitting at the lowest level in the last 18 months — maybe that deflationary reality is what Bloomberg meant by saying that inflation is “contained?”
But it’s not just consumer inflation slowing its way to multi-year lows. The January reading of the Producer Price Index (PPI), which measures producer price inflation slowed for four months in the last six, further confirming the Fundamental Gravity 4 environment in-Q1. Since peaking at +3.4% in July, the pace of producer prices has nearly halved, hitting +2.0% in January, which also happens to be the slowest annual pace in two years.
Our call since July has been for inflation to slow until late Q1 2019 (or early Q2 2019), which is when our inflation models bottom and start to accelerate again. While we can’t pinpoint the exact timing of that bottom, we can tell you that we are closer to the end of this inflation-slowing cycle than the beginning.
As we discussed in “The Playbook” from the Feb. 4 edition of Gravitational Edge, once we see the hard data start to reflate, we’ll start stalking the U.S. energy sector for long exposure.
The Headline Risk bottom line is that you must remember our two core beliefs when evaluating economic data:
- First, never, ever give any weight to how a data point did compared to “expectations.” Meeting, beating or missing what a bunch of economists think is going to happen is meaningless.
- Second, there is a lot of noise in economic data, but the signal can be found by relying exclusively on what the annual rate of change of the data is telling you. Remember, data is either accelerating or slowing, and those are facts. Data isn’t good, bad or even contained; those are opinions.
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