from David Stockman of the International Man blog:
An examination of the CPI weighting scheme sheds more light on the high and sticky inflation readings that stand in the way of the Fed’s inflation-fighting efforts.
Year-on-year change in the components of the CPI for food and energy, from February 2020 to June 2022
For example, food and energy together account for 22.1% of the CPI, but there is a clear difference between the pure goods component of these items versus the portion where services and labor costs domestic are mixed in the figures.
That is, the food at home or grocery store portion of the above food index (purple line) is a figure driven largely by commodities and accounts for 8.3% of the overall CPI . In contrast, the out-of-home food index (blue line), which represents 5.1% of the CPI total, has a significant services/labor component. This is because it represents items purchased from restaurants and other food service establishments that require labor.
Since the pre-Covid peak in February 2020, there has been considerable divergence between these two sub-components of the food index. The commodity-oriented part rises aa 7.4% annual fee, while the restaurant portion only increases 5.6%.
However, regarding the above component, here is a graphic that tells you what is actually going on.
Consumers spent 15% more on groceries in the first quarter of 2022 than in the first quarter of 2020. But when inflation is taken out, they ended up where they started two years earlier, measured in inflation-adjusted dollars.
Needless to say, when even grocery spending is on a treadmill, it doesn’t take much imagination to figure out where the most discretionary purchases are trending. That is, in the bargain basement bin of department stores that have outgrown these items.
In any case, the difference between rising grocery store prices and slightly lower restaurant menu prices mainly reflects the lagged impact of rising wage costs on food-away-from-home prices. The latter will eventually catch up with the components of grocery store staples and then some. After all, over the past five quarters wage rates in the leisure and hospitality sector have increased by 10-15% annually, and these rising costs will eventually pass through to menu prices.
In the case of energy, the bifurcation is even more extreme.
Energy commodity components (eg petrol and diesel) account for 5.2% of CPI weight and are up 28.8% annually since February 2020 (black line with squares). By contrast, energy services components (eg utilities) account for 3.5% of the CPI weight, but have increased by only 10.9% annually (yellow line with circles) over the past 28 months .
Again, energy services will eventually outpace commodity components, once lagging labor and regulatory cost factors are passed on to selling prices.
In short, the mechanics underlying even power and energy are not as simple as the surface impression might suggest. While gasoline and wheat costs are coming off the boil, rising restaurant and energy prices will likely offset a significant portion of the commodity relief.
On the other hand, the purely services components (minus energy services) of the CPI account for almost 57% of the weight in the headline index, and they have nowhere to go except higher.
This is because 31.9% of the weight is accounted for by housing rent (including OERs), where recent readings of 5% Y/Y are lagging sharply behind the 15-20% gains in the measures of the private sector to request rents. Likewise, the balance of 24% corresponds to labour-intensive services, which still have an important recovery momentum from the increase in wages.
These latter components include the following services and their respective weights in the global CPI:
- Medical care services: 6.8%;
- Motor vehicle leasing, insurance and repair services: 4.8%;
- Education and communications services: 5.3%;
- Entertainment services including video, telecommunications, etc.: 3.1%;
- Water services, sewerage and domestic operations: 1.9%;
- Public transport and air fares: 1.0%;
- Other personal services, 1.4%;
- Subtotal, services other than housing: 24.3%;
Needless to say, recent data makes it clear that the relatively tame services components, which stood at 2-3% per year over 2012-2019, are also taking flight. The year-over-year increase for the June 2022 quarter was, in fact 5.5% ccompared to just 3.0% in the quarter of June 2021.
Year-on-year change in CPI services minus energy services, 2012-2022
The Keynesian money printers inflated the largest financial bubble in history due to the absurd belief that there was not enough inflation in goods and services and that therefore the central bank was obliged to stimulate higher inflation from down
Now, however, this illusory inflation is deeply rooted and still gaining momentum. So hitting their 2.00% inflation target from above means only one thing: that they will blow the same financial bubbles they fostered on the way to the current monetary catastrophe.
Editor’s Note: The truth is, we are on the cusp of an economic crisis that could dwarf anything we’ve seen before. And most people won’t be prepared for what’s to come.
Guest post by David Stockman of the International Man blog.