Hey guys, it's Ashley The US CPI inflation data just came out and the headline rate of inflation has fallen to 7.7 percent. Much better than expectations. Month of monthly increase in October was just 0.4 and the stock market went absolutely bananas. Everything has turned green. Champagne has been popped as we speak. It appears that the constipated faces of every YouTuber telling you that everything is about to collapse May Indeed, be transitory and there are finally some really good signs in this inflation report. I'm going to walk you through the good and the bad because in the euphoria that tends to follow a better than expected inflation report, it is easy to forget that it's not all Rosy and sweet smelling. Because perhaps the best thing in this report is the food inflation that has slowed down for the first time during this inflation. Spike Food inflation only went up 0.6 month a month on a seasonally adjusted basis, and food at home only went up 0.4 percent. Incredibly encouraging. You can see that this is substantially lower than the one percent give or take increases that we've been seeing every month earlier this year. The caveat is that food prices are still going up. Don't forget that they're not falling. they're just not going up as quiet as fast as they were last month. But given that wages and real terms are falling at the moment, it still means that it is relatively more expensive to buy food. The 0.6 increase month to month is about 7.4 if you annualize it, which is still a very significant increase in October. We're not out of the woods just yet. Energy Prices increased after falling for three consecutive months beforehand. oil price in October tracks slightly higher than in September, although still well below the peak in June and you can see the gasoline and fuel oil prices increased noticeably in the report. Gas prices, though, have fallen substantially during October and continue to remain relatively lower so far in November. And you can see that electricity and utility gas prices did do a lot better within the energy part of the CPI. And the truth is Energy Prices are currently elevated because we're seeing the war in Ukraine Because we're seeing the sanctions on Russian oil and gas, plus all the turmoil around the global energy markets that has come on the back of all of this. But in terms of understanding the true relationship between price movements and increases and wages that spiral, these fluctuations and energy prices are not really that important, even though they affect things in quite a big way. They are not driven by the inflation wage spiral, so these prices will fluctuate Up and Down based on what happens this winter? What happens with the war? What happens with supplies of energy around the world? But excluding energy from the mix? it is very encouraging that inflation in food prices is slowing down and all items less food and energy only went up 0.3 percent month a month in October Again, substantially lower than in recent months, but there is an issue further down in this report which I have mentioned previously. Shelter Shelter inflation has now increased by 0.8 percent month a month in October I've been warning for some time now that the Shell The number is going to continue increasing and this is what we're seeing play through. Shelter is a massively lagging indicator If rent prices and house prices increase, It doesn't mean that everybody suddenly starts paying a higher rent if you have a fixed term deal without actual increases maybe a year or three years or whatever, The likelihood is that you won't feel the increases in prices until you renew or move. If you own a house, you will only feel how expensive house prices have become when you have to move or maybe remortgage. But given that most Americans are on fixed interest rates, even the increasing Fed rate does not affect how much people pay for their mortgage every month and rent prices being growing at above 10 for the last 18 months or so, you can see that Great has recently slowed down over the last few months, but it's still nine percent year on year, while Sheltering the CPI is sitting at just 6.9 percent. and the explosion in house prices in the US over the last three years has not been captured in the CPI either. So the issue here is because Shelton the CPI has been lagging and sitting very low behind the real increases in rent. When it does catch up, it doesn't only need to catch up to the nine percent that rents are going up right now. it also has to catch up to the 12 that they were going up 12 months ago. So unless we have a very sudden property crash where house prices and rents completely collapse, this shelter value in the CPI is going to continue climbing for a while to catch up with real world prices because of how it works. And the reason it's really important is because shelter makes up one third of the total index. So if shelter goes up from the 0.8 at the moment, to say one percent in the next few months, quite possible that means that one third of the index will be sitting on an annualized rate of 12 to 13 inflation. So even if the rest of the index Falls substantially down to just say four percent a big drop, the overall number is still going to be 6.9 on average. So the potential risk here is that if the market does not take into account the Nuance of what's happening with inflation in these different parts of it, inflation numbers can look artificially high for some time, even if in reality prices stopped growing and excluding food and energy. Shelter is 42 of the core inflation number, so the impact there will be even higher. And I Know some people will say look, Sasha The market is really smart and of course they will price it all in. They understand the nuances of what's happening with inflation, but that would be giving credit to the exact same people who one year ago were still saying inflation is transitory. Not at all an issue will go away all by itself without needing to raise interest rates when the numbers obviously told you at the time. The exact opposite as I was saying right here on this channel. Looking at different data, consumer demand is slowing down and this is definitely helping bring down inflation. People's money just does not go as far and because wages have not been increasing, people are forced to cut back on non-essential spend and it means we are not seeing the wage inflation spiral takeoff. This is bad for people right now in terms of their inability to spend. It is good for not fueling more inflation. We've seen the numbers come through in the Q3 results for companies like AMD and Netflix that show how much people are cutting back on non-essential spend and we're seeing a global decline in ad spend across the board because companies are not getting the same rate of return on the ads as they used to in a perverse sort of way. This is all a good thing because this is exactly the sort of thing that will bring inflation down that is bringing you down. This is the behavior that higher interest rates actually encourage, Because as inflation comes down, real wages will stop falling, consumer confidence will return, and the stock market has every chance of breathing a sigh of relief. Another important thing to remember is that the next meeting of the Fomc the FED committed the decides on interest rates will come just after the next set of inflation data comes out for November during December. So if November numbers continue you looking better. If food inflation continues to slow, it is likely that Fed will adjust course. Not because they suddenly completely change their mindset like everyone seems to talk about. The interest rate is now sitting at four percent, inflation has now dropped down to 7.7 And that means that interest rates are now 52 of the way from zero to matching inflation more than halfway in February. This year, not that long ago, inflation was sitting at 7.9 percent, and interest rates were basically at zero. So this is a very, very big shift. And remember, the FED is also pursuing a policy of quantitative tightening At the same time, It's not as easy to see in numbers, but it enhances the effect of rate increases. If inflation next month remains at 7.7 or drop slightly. I Would be surprised if the FED pushes for another big hike. At the October meeting, the Fed was split between moving rates to 4.5 percent and 4.25 by the end of the year. at the higher end of the scale. Know and this expectation had an almost cast iron guarantee of rates increasing by 75 basis points in November. So the board was split between a 50 basis point hike and a 25 basis point hike for the December meeting. And if inflation does recede again in November, that data will come out in the morning of the first day of the committee meeting. in December I Imagine there is every chance we'll see only a 25 basis point hike. and if that happens, the stock Market May Well go absolutely nuts completely. Bonkers will see endless newspaper headlines that inflation is over. It has been finally defeated. We might even have somewhat of a Santa rally leading up to Christmas, But it really would be premature to try and understand what happens if shelter keeps the overall inflation numbers artificially High through Q1 and Q2 next year. And then again, there are the unknown unknowns that can turn up at any point as we've seen this year to completely shift. The Narrative Russia could pull out of Ukraine in one way or another, or they could have a coup or some other positive resolution which I I'm guessing would send the stock markets into the stratosphere or we could see China invade Taiwan And then we're gonna have the exact opposite. The geopolitical situation is more unstable now than it has been in the last few decades, and in the meantime, it's great to see some good news come through with inflation. Let's hope it just gets better next month.