Hey guys, it's Sasha The US inflation data has just come in, and although the headline figure fell from 6.5 to 6.4 percent, there were a few points of concern. The stock market seems to have initially reacted positively to the CPI data, then sort of changed its mind, which is odd given that the forecasts were for a lower net figure. Now, there are some hugely encouraging signs in this data: I'm going to walk you through all of these in detail, but a few of the numbers that just came in are showing signs that inflation is not going away overnight. So while the headline inflation came in at 6.4 food, inflation remained relatively high and Rose half a percentage Point month on month, The overall level of food inflation is at 10.1 percent, with food at home sitting at 11.3 percent.

Both of these numbers are slightly better than they were the month before, but food inflation remains very stubborn in the US and this is one of the CPI components that is especially acute for regular people because you can't really go and not buy food. Compared to some of the other components, the other acute element is energy and energy. Inflation has dropped massively, although month-to-month movements are not yet negative. Energy overall is at 8.7 which is actually higher than it was last month.

The reason is higher is because some of the commodity prices in December dived massively the year before. I'm going to show you that in a second. The good news with energy is that this part of the CPI data is going to start showing negative numbers in the coming months some potentially very strong negative numbers as we head into the summer. If the energy prices don't Skyrocket again, massively, we're probably going to see a big negative pull on the overall inflation numbers coming through from the energy sector.

U.S Gas commodity prices have fallen a lot in recent weeks to the lowest level since April 2021, and you can see that December 2021 saw a big drop in gas prices, which then steadily climbed from January onwards. The fall in commodity prices is not being reflected in the CPI data just yet. As always, a drop in wholesale prices is a little slower to be passed on to Consumers than an increase I Wonder why? but you can see that in February the drop year on year is going to be pretty substantial, and if the price remains where it is, give or take, gas will have a big negative weight in the CPI when we head into the summer directly and through the cost of electricity indirectly as well. And it's a similar picture with oil.

You can see that Brent crude prices were increasing during most of 2021, but then fell sharply in December. So the price in December 2022 was relatively higher. but when we're comparing January data, the rising price is a year ago mean that the two are almost exactly the same, hence why gasoline and oil prices are sitting so close to zero. But look at what happened with oil prices from February onwards because remember Russia invaded Ukraine on February 24th.

So again, like with gas, when February data comes out next month, I am guessing oil is going to start playing a strong and negative role in CPI as well with energy. Overall pushing the index down. now. car prices are also coming down, and we have seen that in the index as well.

New cars are only up 0.2 month a month, seasonally adjusted and used cars continue falling two percent a month every month. The one component of the CPI that is not falling but keeps going up is shelter, which is exactly what we expected. Shelter is up 7.9 year on year, which is now substantially above the average inflation read. And because shelter makes up one third of the total index, the further up it goes, the more upward pressure it exerts on the overall number.

The encouraging news is that this shelter number is now in the same ballpark as the current increases in rent and house prices, which are also sitting at around eight percent. The problem is that rent and house prices have already been going up by more than 10 percent for a year and a half or whatever and because the impact of those prices going up takes time to show up to filter through to the shelter, part of the CPI that CPI component has to keep going up to catch up with those previous increases. So when we see this shelter number next month is is probably going to go and sit at well over eight percent and maybe then head even as high as nine percent or higher in the next few months. The risk there is that while the rest of the index things like energy, food Etc are all gradually on the way down, shelter will be pulling the average up because of its big weight.

The good news though is that we get one more read of inflation before the next Fed meeting. and when the February data comes in in March, we'll have a story of two halves: energy, food, car prices Etc are all likely to be heading in the right direction based on the data we've got right now towards that Fed two percent inflation goal Target But shelter is going to be the elephant in the room setting it eight point four percent or eight point five percent or whatever is going to be. and I'm guessing that the decision at that point for the FED is going to depend on how they interpreted this shelter data. If house prices and rent costs continue slowing down gradually and start tracking below the shelter CPI Read: it will mean that the shelter number, while it's still going up, will be on the way to topping out and then may start coming down maybe this summer, maybe some point later this year.

But I'm also guessing that unless we see a substantial drop in food prices which is maybe the most concerning part of this particular inflation report, the FED will probably go right ahead without anticipated 25 basic Point increase on rates to exert a bit more downward pressure on demand and nudge inflation down a bit more because it's just being that little bit too resilient. I Am not sure if the market will feel good or bad about that. it's pretty much the base expectation I Think at the moment that we're going to get that increase, but as we get more inflation data over the next few months going into the summer, we should start seeing a big negative pull from energy. The direct part is only about eight percent of the index the Direct Energy component, but indirectly, energy also plays into pretty much every other component as well.

It's very hard to strip out all by itself if energy is showing minus 20 or minus 30 in the index. that is largely going to counterbalance the upward pressure from shelter. which should mean that the headline inflation number at that point continues moving down, and then if shelter does top out at some point in the second half of this year and starts then coming down towards the end of the year, That may happen at roughly the same time that energy prices will then start lapping these new lower prices that we're seeing today. So although they might have strong negative numbers through the summer, they won't have those numbers a year from now.

So energy stops at that point if the prices don't move massively one way or another having that big negative weight in the CPI, but hopefully shelter at the same point will be coming down again and the two May again cancel each other out. The good news in all of this for me is that it probably means that info inflation data will start looking a whole lot more consistent, a whole lot more reliable, a whole lot more predictable later on this year. And unless something major, politically or economically changes, which by the way, is highly likely given what we've been seeing in recent months, that may provide the sort of certainty that the market thrives on, so it could well be based on what we're seeing right now, the Q3 and Q4 may look a lot more promising than Q1 and Q2 as far as the economy goes. At the moment, analysts are still predicting two more rate increases 25 basis Points each in the next two meetings, but on the basis of what we're seeing, it is probably more likely that we'll see just this one increase coming up, followed by a hold as the most of the inflation factors head down and Fed may wait and see what inflation does over the summer before taking further action.

Now, a hold is not exactly a pivot that some people are really hoping for. I Certainly don't expect the FED to start doing a U-turn and magically reduce rates immediately after increasing them unless something crazy happens like we get a big economic crash, but it should at least stabilize the financial Outlook and people will start talking about when rather than If the Fed will start reducing rates at that point, which will make for a much more positive conversation. If you found this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching I Really appreciate it as always.

I'll see you guys later Foreign.