As the CPI Eases, Economists Declare "No Recession" Because This Time Is Different
The federal government’s Bureau of Labor Statistics released new price inflation data on Tuesday, and according to the report, year-over year inflation continued to climb—although at the slowest pace since July of this year. According to the BLS, Consumer Price Index (CPI) inflation rose 3.2 percent year over year during October, before seasonal adjustment. That’s the thirty-second month in a row of price inflation above the Fed’s arbitrary two-percent inflation target. Month-over-month inflation was flat with the CPI rising 0.04 percent (essentially zero percent) from September to October.
The continued growth in the CPI was driven largely by "food away from home" (up year over year by 5.4 percent) and shelter, which was up year over year, by 6.7 percent. Moderation in the rate of increase, on the other hand, relied largely on year-over-year declines in the price indices for gasoline (down 5.3 percent) and used cars and trucks, which were down 7.1 percent.
It will grieve many ordinary people to note, however, that while food prices have somewhat moderated, the other most essential category within the CPI overall index—shelter—remains near a 35-year high when measured year-over-year. The shelter index rose 6.7 percent from October 2022 to October 2023. That is a similar annual increase to what we saw in mid-1977 and mid-1982. Meanwhile, the month-to-month increase from September to October was 0.3 percent. That's for all types of shelter. The situation is more grim when we looks just at renters. The index for "rent of primary residence" has been up for three months in a row and may be reaccelerating toward the 27-year high in monthly rent growth reached in September 2022.
One noticeable oddity in the CPI report was a purported 34-percent drop in the index for health insurance, year-over-year. Those who actually pay premiums will find this rather hard to believe. The CPI report also showed a very suspect two-percent decline in the index for "medical care services," year over year. As explained by Wolf Richter at Wolf Street, the index for medical services has been problematic for some time, understating month to month changes while overstating year-over-year growth. The new method has further created bizarre swings in the index, turning it into, as Richter says "chickenshit."
Any ordinary person knows that medical care services are hardly falling, yet the index for medical care—which is a not-insignificant 6.3 percent of the full index—tells us prices are going down. On Monday, Bloomberg noted how the CPI index has become detached from reality on health services: "The health insurance index ... is currently at its lowest reading in nearly six years. But what Americans actually pay for coverage is a different story." Healthcare prices in the real world are rising rapidly, but you wouldn't know that from reading about the CPI, however.
Moreover, in spite of claims that price inflation is now "falling" or moderating, real average earnings continue to go nowhere. Thanks to a 20-percent increase in the CPI over the past three years, the real average wage has increased a mere 23 cents since the eve of the Covid lockdowns. That, of course, is an average and understates the substantial losses (in real terms) felt by households at the lower end of the income scale—who have not seen as much income growth overall during the past decade.
The news of some moderation in the CPI—which remains nearly 19 percent above the index as measured in January 2020— was interpreted by both Wall Street and much of the financial media as a great victory over price inflation and as evidence of the imagined "soft landing."
The Wall Street Journal, for example, reported on Wednesday:
The U.S. economy is approaching what most economists had thought either unlikely or impossible: inflation returning to its prepandemic norm without a recession or even much economic weakness, a so-called soft landing. ... “What we are expecting now is a soft landing,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. “We expect the economy to weaken quite a bit but it does look like we’ll avoid an outright contraction” in gross domestic product. ... Six months ago, the consensus among economists surveyed by The Wall Street Journal was that the economy would enter a recession over the next 12 months. In October’s survey, the average forecast of economists was for no recession.
The argument offered by most of these economists, however, amounts to little more than "it's different this time." Even the Journal concedes "If they’re right, it would be highly unusual. In the past 80 years, the Federal Reserve has never managed to bring inflation down substantially without sparking a recession."
By the BLS's own measure, CPI inflation remains well above the Fed's two-percent target even as numerous economic indicators point toward recession. Tax revenue, the yield curve, temp jobs, manufacturing activity, and the leading indicators index all point toward recession.
What really matters in terms of stock prices and Wall Street frenzies, however, is the prospect for a return to easy money. Any decline in CPI inflation is interpreted as a sign that the Federal Reserve will once again turn very dovish and force interest rates lower. With price inflation now moderating, it is assumed cuts to the target policy interest rate will soon be in the cards, and Wall Street is getting excited. Unfortunately, the investment game is no longer about underlying fundamentals, but is about making money off the bubbles created by Fed-induced monetary expansion.