CPI inflation comes in hotter than expected … the timing of rate cuts gets pushed back – again … the difference between inflation and prices … the great “price reset” puts us in a new world

The narrative that the recent bout of reflation is just a “blip” isn’t panning out. That’s the quick takeaway from this morning’s March Consumer Price Index (CPI) report showing an acceleration of inflation.

On a month-over-month basis, the CPI climbed 0.4%, more than the estimate of 0.3%. Similarly, the year-over-year reading of 3.5% was higher than the Dow Jones economists forecast of a 3.4% rise.

Core inflation (which strips out volatile food and energy prices) also accelerated, jumping 0.4% on the month and 3.8% on the year. Both figures were higher than their respective estimates for 0.3% and 3.7%.

In yesterday’s Digest, we wrote:

The issue is that if the recent trend of relentlessly strong economic reports continues – like, say, a surprisingly hot CPI reading tomorrow – then traders may be forced to recalibrate their stock market bets to be more in line with hawkish commentary like [Federal Reserve Board of Governors] Bowman’s.

That’s what’s happening as I write.

As of lunch, all three major stock indexes are down more than 1%. And over in the futures market, the odds of the first rate cut happening in June have crashed from 56% yesterday to 18%. Even if we look farther out, the odds of the first rate-cut happening in July have fallen to just 38% from 50% yesterday.

Meanwhile, the 10-year Treasury yield is spiking. It’s jumped all the way to 4.52% as the narrative of multiple interest rate cuts in 2024 evaporates. It’s going to be very hard for the bull market to roar higher with the 10-year Treasury sitting at 4.52%.

So, what’s the bottom line from this morning’s CPI report?

Inflation is no longer dropping smoothly. Instead, it’s flatlining at a level well-above what the Fed wants. So, don’t bet on a rate-cut bonanza this year.

While we hope for a return to disinflation, let’s shift our gaze to what matters more to your wallet than inflation – actual prices

It’s not inflation that’s hurting your budget, it’s high prices.

Below is the headline of a recent article from The Washington Post that perfectly illustrates many people’s inaccurate understanding of the relationship between inflation and price:

Inflation has fallen. Why are groceries still so expensive?

The answer, my dear Washington Post, is because inflation isn’t the same thing as price.

Inflation is a measurement reflecting the change between two prices. So, all that “falling inflation” means is that prices are continuing to get more expensive, yet at a slower rate.

The analogy we’ve used before in the Digest in that of a Ferrari accelerating around a racetrack with a beginning speed of 100 miles per hour. And let’s say the “inflation” of its speed begins at 10%, then drops to 6%, 4%, then 0%.

Clearly, the Ferrari’s “speed inflation” is falling. But what’s happening to the absolute speed itself?

Well, 100 miles per hour x 10% speed inflation = 110 miles per hour.

110 miles per hour x 6% speed inflation = 116.6 miles per hour.

116.6 miles per hour x 4% speed inflation = 121.3 miles per hour.

121.3 miles per hour x 0% speed inflation = 121.3 miles per hour.

So, while speed inflation has dropped from 10% to 0%, what has happened to absolute speed itself?

It’s jumped from 110 miles per hour to 121.3 miles per hour.

Tying back to grocery prices, here’s the cumulative effect of all the food inflation since 2019 on your family’s budget

From The Kobeissi Letter:

Change In Price Since 2019, by Food Item:

1. Cocoa: +345%

2. Orange Juice: +260%

3. Olive Oil: +219%

4. Sugar: +120%

5. Fruit Snacks: +77%

6. Cooking Oil: +54%

7. Chocolate Bars: +52%

8. Apple sauce: +51%

9. Beef: +51%

10. Mayonnaise: +50%

11. Loaf of Bread: +42%

12. Eggs: +40%

13. Milk: +40%

14. Cereal: +38%

15. Butter: +24%

Inflation has officially been at 3% or higher for exactly 3 years.

The Average American is now paying nearly 40% MORE for groceries than what they were paying in 2019.

Over 100 food items have seen inflation above 50% since 2019.

Have you gotten a 40% or 50% raise since 2019?

This focus on real-world prices helps explain the results of a survey by CNBC and SurveyMonkey that came out yesterday. It found that more than 65% of Americans now live paycheck-to-paycheck. That’s up from last year’s figure of 58%.

And what’s the stated reason for this strain on personal budgets?

Shocker – inflation, which was cited by 69% of survey respondents which the highest response rate in the survey.

(Technically, they should have answered “higher prices” not “higher inflation.”)

But if this leaves you hoping for lower prices, think again

The default reaction to this is to want lower prices across the board.

But while this might be attractive at first glance, such a deflationary environment is the last thing we want.

When prices fall, businesses and consumers hold their cash. After all, if prices are dropping day-after-day, then “tomorrow” is always the better time to make that purchase since it’ll be less expensive.

But the practical effect of this “tomorrow” psychology means wallets close and money stops flowing. So, companies are forced to cut prices in hopes of luring buyers into the market today, not tomorrow. But this just reinforces the deflationary mindset.

So, more wallets close. Economic growth stalls. Corporate profits margins are destroyed. Cash-hemorrhaging companies are forced to lay off employees. Household budgets grow strained. It can be an awful cycle.

Now, this might leave you scratching your head…

Okay, prices are much higher today than they were a few years ago…

But if they came down materially across the board, it would be bad for the economy…

So, does that mean we just have to live with a “new normal” of higher prices for many items from now on?

Pretty much.

For many goods and services, the trillions of dollars of helicopter money from the federal government that flooded the economy during the Covid pandemic resulted in a one-time “price reset” that bumped baseline prices substantially higher.

So, even if inflation drops to 2% (which this morning’s CPI data show isn’t happening all that easily), the new baseline price tag for many goods/services won’t ever return to where it was.

To what extent is the budget of the average American prepared for this new normal in perpetuity?

Poorly, if you’re in my state of California.

From CalMatters.org:

Prices have grown about 20% overall since 2020, according to an analysis by the California Legislative Analyst’s Office…

[Sarah Bohn, economist and director of the Public Policy Institute of California Economic Policy Center] said Californians’ wages have not kept up with inflation:

“Wages only grew 15% than before the pandemic. On paper, that looks amazing, like a $5-an-hour increase. But after inflation, it feels like a pay cut — I calculated that it’s like a $1.25-an-hour cut.”

And the hits just keep coming

While we’re talking about grocery/food prices, and having just mentioned California, here’s a quick story from my neighborhood.

Here in Los Angeles, in recent years, we’ve seen all sorts of new fees and surcharges added to restaurant bills: “supply chain surcharge” … “fuel surcharge” … “employee health fee” and my personal favorite “kitchen appreciation fee.”

They’re all methods by which restaurants attempt to pass through their own “new normal” of higher prices to customers. Well, we got a new one recently…

A “security” fee.

A rooftop bar and restaurant in downtown Los Angeles is now charging diners an added fee to “ensure the safety for all staff and guests.”

But rather than a flat fee per customer, the charge comes as a 4.5% addition to your bill.

Now, I’m not a fan of paying more, but I’m very relieved to know that if hoodlums storm the restaurant while we eat, my $50 filet will entitle me to more “safety” than my date and her $18 Caesar Salad.

In all seriousness, these high costs are changing consumer behavior. From Bon Appetit:

Since 2020 the cost of dining out has skyrocketed across the US, and even as other forms of inflation have eased, menu prices keep climbing.

In 2023 restaurant inflation outpaced groceries, which meant that even as Americans were spending more dining out, data suggested they were going out less…

…Things may not get more affordable. [Ryan Sutton, a restaurant critic who writes the newsletter the LO Times] expects that many of the increases are here to stay, and that some restaurants will be permanently out of reach for most people.

This is just one illustration of life after the great price reset.

To what extent is the Fed paying attention to these real-world economics?

Is this new normal and its implications for the U.S. consumer discussed at all in the Fed’s closed-door meetings?

And to what extent is it on the radar of President Biden and former President Trump?

A couple week ago, President Biden was on The Today Show. When Al Roker asked Biden a question about the economy and why many Americans aren’t feeling good about their economy situations, Biden replied:

Well, I’d say we have the best economy in the world. We have got to make it better. We really do have the best economy in the world. Jobs are up more than they have ever been.

While this is at least partially true, it doesn’t speak to the reality of the average American who’s now spending 40% more on groceries … who’s facing the new normal of a great price reset for all sorts of goods/services … and who’s now getting nailed with 4.5% “safety fees” at restaurants.

I’m not convinced our government officials are aware of this lived truth for Main Street America.

Speaking to the Fed specifically, how might such an awareness impact its interest rate policy later this year?

Remember, half of the Fed’s mandate is “stable prices.” Well, today, grocery prices are closer to stabilizing…but at a level that’s 40% higher than a few years ago.

Does this matter to the Fed as it mulls the timing of rate cuts?

Tonight at 8 PM Eastern, Louis Navellier and a special guest will be discussing the Fed and rate cuts in a live event called the Election Shock Summit

While Louis has gone on record suggesting the Fed will cut in June, tonight’s special guess disagrees.

This evening, you’ll hear when this guest expects rate cuts to happen… what’s behind that timing… the impact of the 2024 presidential election on the investment markets… an election season trade that’s historically worked every time in the last 12 presidential elections… and how Louis and this guest are positioning their money today in light of what’s on the way.

To join tonight’s event, click here to automatically reserve your seat.

Wrapping up, inflation progress has stalled, and there doesn’t appear to be any meaningful relief for the average American’s wallet in the immediate future. The reality is that the great price reset has taken place, and we now live in a “new normal” of higher prices.

The questions are “what will it mean for the Fed’s rate cuts this year?”, “what will it mean for the presidential election in November?” and “what should you do about it in your portfolio?”

Tune in tonight for how Louis and his special guest are answering these questions.

Have a good evening,

Jeff Remsburg