CPI Growth Slowed, Effects of Inflation, and the Federal Deficit is Only Getting Worse

Core CPI was up last month but the pace of growth slowed as expected. This was driven mainly by housing—as home price gains have topped the prior housing bubble peak—and Hotels—as long-awaited vacations are finally being taken and business travel resumes. Unlike the CPI, producer price data unexpectantly hit a multi-year high showing signs of inflation. The Fed has yet to answer what time period can still be considered “transitory.” Options volumes are also still elevated, especially relative to share trading volumes, as the surge of new armchair investors brought on by the pandemic continues. But do these less experienced investors know all the risks involved? Meanwhile, the federal deficit is only going to increase as the infrastructure plan passed by the Senate and a Social Policy bill demanded by the democratic lead House will be a whopping combined $4.7 trillion dollars. Additionally, due to inflation, government payment programs such as Social Security are forced to increase.

1. CPI increase at 0.5% last month.  As part of the normalization, equivalent rents led the way higher as college students and other renters return to the cities. The Chip and auto shortage was also acute:

Source: U.S. Bureau of Labor Statistics, from 8/12/21

2. While CPI came in as expected, PPI is still showing robust inflation which may portend future CPI increases.  When does “transitory” end?

Source: The Daily Shot, from 8/13/21

Source: The Daily Shot, from 8/13/21

3. Pent up vacation and business demand led hotels/lodging to a full recovery in prices paid:

Source: The Daily Shot, from 8/12/21

4. Buying a home has become a price bubble in and of itself.  This too will have to normalize; fortunately, most owners have much less leverage and stronger balance sheets than in 2007:

Source: The Daily Shot, from 8/12/21

5. Now that most of the pandemic-driven home improvements are complete, lumber prices have fully normalized:

Source: The Daily Shot, from 8/12/21

6. The pandemic brought on the stay-at-home investor, meme stocks, Robinhood and the use/abuse of options.  Do the new players know the risks?

Source: The Daily Shot, from 8/12/21

7. This is before the $1.2 trillion infrastructure plan and the $3.5 trillion “everything else” plan passed by the Senate.  The total would roughly equate to $22,000 of new debt for every man, woman and child in the U.S.:

Source: The Daily Shot, from 8/12/21

8. In addition to the trillions Congress is spending (more than revenue), the budget deficit is going to get worse due to the CPI increasing all government program payments:

Source: Social Security Administration, from 8/13/21

9. The pandemic has helped make EM equities dirt cheap:

Source: The Daily Shot, from 8/12/21

10. More normalization, but when will the markets react?

Source: The Daily Shot, from 8/12/21

11. Will China be able to contain the Delta variant?

Source: The Daily Shot, from 8/13/21