Hey guys, it's Sasha Inflation date in the United States just came in and the CPI is at 3.2 overall, which was bang on markets expectations and overall the numbers are looking great. Everything is trending down, which is a great thing for a potential Market recovery. But there are two very, very ugly things in this inflation data that are a cause for concern and one of these is already showing the problem of the FED overreacting and that rate increase pushing the inflation data itself. This is very much a case of the FED shooting itself in the foot and pushing the economy into a high risk.

Tail Spin For No Good Reason Overall, the US inflation data looks bright, the inflation is at 3.2 overall, and look at the data. Over the last few months, month on month, we've got 0.2 percent, 0.2 percent, and 0.1 percent. These are bang on the sort of monthly numbers that you want to see for inflation. Overall to be a two to two point five percent on an annual basis.

Now last month inflation was at 3.0 so you might be wondering, hang on Sasha 3.2 percent is higher than three percent, so isn't inflation going back up again? Isn't this a concern? Because I am sure there will be a lot of people out there pointing to this and saying look, inflation is sticky. It is not going further down. It is not going away. Well, this is an artificial blip because if you look back at the old data in June 2022, last year, inflation went up 1.3 percent month on month.

So when you were measuring the 12 month inflation from June the last year to June this year, you were measuring an increase on the back of that huge monthly jump. So then when you skip one month of July, the month-to-month increase back in July 2022 was 0.0 percent. So when you were measuring the 12 month inflation from June last year to June this year, you were measuring an increase on the back of a huge monthly jump. and then in July one month later, the month of month increase was 0.0 So when you're comparing the cumulative movements and prices, that one point three percent jump in June falls off and you're comparing a month that was flat versus June in the previous month, if that makes any sense.

It's just a numbers play numbers thing. Although you're seeing a technical increase in the overall number, the net effect is still trending down, which is important, and you can see that in the monthly data where the monthly increases continue to be low. Food is a very big cause for celebration because food inflation is now down at 4.9 it was at 10 of the time of the year and food at home is now at 3.6 This is a huge drop from last month last month, food overall was 5.7 and food at home was 4.7 Food at Home inflation has dropped by 1.1 percent in just one month. This is fantastic news because food is one of the Three core pillars that underpins basic living costs to pretty much ultimately Drive everything else in the inflation data.

Another critical element the second one is energy and energy overall is at minus 12.5 But here is the kicker in the teeth: Gasoline prices are down 19.9 year and year because even though oil prices went up a bit recently, the retail prices are lagging the real world oil prices. While oil companies are busy profiteering and talking of profiteering, look at the Energy Services bit pumped gas prices down to 13.7 year on year. And this is while the natural gas commodity the same thing that those energy companies are paying for themselves, that price is down 70. This is absurd because the moment that the commodity prices go up, retail customers prices shoot through the roof.

But when the prices come back down like they are right now and have been for the last eight months down 70 percent, the price that you pay is only down 13.7 So the good news there is that while the retail prices are still high, they are going to continue going down and post those negative numbers in CPI index for quite a while as Market forces stakehold. But then look at the price of electricity. What the actual is this plus three percent. Because here is some data from Statista: 39 percent of U.S agencies generated from natural gas.

You remember that thing that is 70 down year on year Nineteen percent of U.S electricity comes from coal, and coal is down 65 year on year. Uranium is up ever so slightly around eight percent with the crisis in Niger and the rest of the Renewables aren't affected by commodity prices really at all. So yeah, the majority of electricity sources in the US are down 70 percent year on year. but prices that people are paying prices that you are paying are up three percent.

Makes perfect sense. The important Point here though, is that this entire energy part of the inflation, the consumer. the Energy Services part is going to continue slowly eating downwards, because eventually Market forces will have to make it happen. and this is a good thing.

It will help directly and indirectly through the cost of everything else that also uses energy either to be produced or delivered to you. Now core inflation is at 4.7 which is only slightly down from 4.8 percent it was last month, and the the reason is simple. it's shelter. that's the predominant thing that's the majority part of that entire number.

The price of paying rent or your mortgage is sitting stubbornly high for two main reasons: The huge increases in rent prices and house prices from last year are only just now beginning to come through in this lagging data set. Because it takes time for people to start moving before you move. You don't really care about once you move or once you have to renegotiate your rent payments. That's when your prices jump and that's when you begin seeing it in the data, but we now have the added effect of having high interest rates.

Mortgage payments for anyone who wants to move are a hundred percent higher or more compared to the same exact property, the same exact price 12 months or 18 months ago. And if for whatever reason, you have to remortgage your house or you have to move somewhere that property, let's say it's cost the same the one you're moving into Because the FED increased rates so sharply your monthly payments will be something like double give or take and this is going to become progressively a bigger problem. Now, we are already seeing in the data that house prices have started collapsing because of this. House prices in the US fell at the fastest rates since the data started being recorded in 1963 in Q1 this year, and they continued Falling Again in Q2 down more than 13 percent in just the last two quarters.

This is unprecedented, and this is a substantial drop. While the rest of the economy is actually picking up doing pretty well and the labor market is strong, this is one negative effect caused by the FED increasing rates way too far at a point in time when they didn't actually need to do it. Now some might say that you know house prices were already too expensive. They needed to correct it was overdue.

But the problem with the pace at which the house prices are now dropping is that it starts working against the economy. And while you might want to go and buy a cheaper house, the economy bid might become a problem. If you get a new job, that means you have to move. you would need to go and sell your house at a much lower price than it was nine months ago.

And then you will have to actually pay a lot more per month in your monthly mortgage payment if you go and buy new anyone. Because of the high interest rates after you move, the difference is now pretty big and this will work against the economy as labor becomes locked geographically and unable to go and move between different companies, different cities, and different geographies. The goods part of the CPI is still sitting very low. Cars are basically sitting at zero percent inflation.

Over the last few months, apparel is trending down, Transportation is still high at nine percent, still a bit high and actually higher than the last month's data, but it's actually the same effect as food. June Last year was plus 2.1 month to month and July was minus 0.5 percent. So it's the same sort of numbers play. If you look at the last few months data, the average month-to-month movement is just 0.25 and that's about 3.4 per year.

So it's definitely trending down too to see the second big problem, you need to look at the detailed data because inflation on Goods is looking fine. It's looking pretty low, but the high energy costs and the high shelter number are squeezing households who are struggling to pay basic bills. And until now, we, we haven't really seen the effects of a wage by spiral take hold in the U.S But in this inflation read, we're beginning worryingly to see some signs of it if you scroll down to the services part of the second additional table in the inflation data, Many services that are mainly driven by the price of people's time are up a lot. Not all of them, but a fair few are and it's a concern.

Garbage and trash collection at 8.8 annually and 1.1 month a month. Motor vehicle repair at 19.5 annually and 1.4 month of money. these are huge numbers. most insurance 17.8 and 1.7 month and month kind of related to the repair bit that's a 10.6 more expensive than last year.

Fees for lessons or instructions are 14.2 percent compared to the last year haircuts and personal care at 5.3 Over the last year. These are all significantly higher than the average rate of inflation, and many of them are going up a lot month to month. Still, today, this may be lagging problem. It may go away, it may not materialize or go into something, but it might also be the early signs of a very big problem with the weight spiral that can be very difficult to stop if it actually genuinely gets going.

And the really frustrating thing is that the reason for this wage price spiral is now largely driven by the Fed. The increases in mortgage costs and rent are being pushed because of the interest rate raises and nothing else. The actual property prices are dropping, but people are still. while the prices are dropping, having to pay more per month because of the interest rates, and the government is letting the energy companies do whatever the they want and charge stupid prices.

While commodity prices are down and we're now seeing what happens when you let those greedy literally steal people's money, people end up needing more money and ask for increases, Going get different jobs and we create a genuine big risk of a wage spiral. We have one more inflation data to read for August coming on September 13th so we'll know a bit more on how this is developing before the next Fed meeting. but the signs are now worrying because this wage spiral can quickly destroy demand and together with the interest rates being way higher than they should be, that can start a very sudden deflation. Spike And if you thought inflation was bad, a deflation Spike would be a whole lot worse.

I Have a funny feeling that as the FED has been consistently missing much more obvious points and got so much really badly wrong over the last three years, there is absolutely no chance at all that they are calculating this risk. They are not seeing adult. They're blind to it. They're just doing whatever they're doing without understanding where the actions may actually lead.

And this might be pretty bad. We might be looking at inflation data and they might be looking inflation and say hey, inflation is sticky, It's not going down. We might go and do another rate increase in September and at the moment that looks likely and that is a very real Danger Insurance Prospect Remember, a lot of the impact of these rates increases is still not properly filtered through into the economy. It takes time for the interest rates to actually really affect long-term commodity prices, prices of houses, so on, and so on.

The rates are already significantly higher than the average rate of inflation, and the Gap is increasing. This is affecting the price of debt for businesses in a really bad way. I Can already see the FED statements coming out in the coming weeks and the media headlines saying inflation is sticky. It's still way above the two percent Target And it's not going down because the high interest rates and low energy regulation is artificially pushing those prices up.

It's almost like a self-defeating strategy. The FED goes and increases rates to fight inflation. Then you go and make prices for keepings like shelter go up because of your rate increases inflation. Then stays up because of that.

Maybe Maybe stays flat, Maybe goes up a little bit. Your own power comes out and goes and declares inflation is still sticky. It's still going up. It's not doing anything.

We need to push rates even higher because the FED seems to be incapable of actually hiring at least to one analyst with maybe a brain in their head to look at the data and tell them that the problem is not the one that they think it is and it's not in the place where they think it is. We're already seeing this happen following the last three rate increases, which were completely necessary. And the worst thing is if the FED goes and does push the economy down the road of a potential wage spiral, then we might be staring at sudden job losses and a sudden deflation Spike that nobody could have seen coming. Things could get seriously bad.

Not because of the broader economy, not because of the war in Ukraine, not because it was what's happening elsewhere in Europe, Not because of whatever some made-up reasons they're gonna make up tomorrow. It doesn't Really, it's gonna be happening for the third time, simply because the FED completely up.