The Bureau of Labor Statistics (BLS) is set to release the CPI inflation index numbers in a little over a week on Dec. 13 for November 2022. The reality is that they may not really show much improvement for most Americans, despite the fact that prices have tempered their gains in the past several months.
This can be seen in the chart below that I have prepared.
It shows that in June the Consumer Price Index for All Urban Consumers (the CPI-U index) peaked at 9.1% on a year-over-year (YoY) basis. Since then the CPI-U index has slid down to 7.7% YoY as of October.
But here is the point, the CPI-U index started the year at 7.5%. So even though the November index might possibly show a further decline from the 7.7% rate in October, it is not likely to be far below the 7.5% rate in January 2022.
That essentially means that inflation has gone nowhere during 2022. It is high and not really any better than it was at the beginning of the year.
Where This Leaves Investors
The real issue is how fast inflation slows down or falls. The pace of deceleration is what matters. It is the rate of the rate of change, also known as a second derivative.
So, for example, from June to July the rate of inflation decreased by 6.59% from 9.1% to 8.5%. But by October, the rate of inflation decreased by just 6.1% from 8.2% to 7.7%. In other words, the rate of deceleration has slowed from 6.59% to 6.1%.
The point here is that prices are still rising, i.e, there is inflation. But that rate of price increases is decelerating at a slower and slower pace. That implies that inflation is stuck in the system.
This is what the market is missing. Prices are still rising and the Fed is still going to have to raise rates, no matter what the Fed says, to get rid of consistent price increases.
Moreover, this does not allow consumers to get back to the price levels that were at during the Trump Administration. It just means the price levels are growing at the same pace they were at the beginning of 2022.
That is not going to make stocks and bonds rise if inflation stays around at a persistent level. It means that rates will likely stay at high levels or even keep rising just to dampen the inflation psychology inherent in the system. That is not a long-term positive development for investors.
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