The Consumer Price Index flashed across our screens in big red letters. Like a gunshot in a crowd. The Dow Jones Industrial Average fainted. It was falling nearly 300 points in less than an hour before finally gaining its composure.
It's not that this was unexpected. All of Wall Street predicted that the CPI would take a big jump. But the surprise was that Inflation came in above 9%, a level that almost none of the analysts thought likely.
This CPI was the hottest inflation reading since the 1980s. And now will put in motion a couple of responses that the Street would like to avoid.
First and foremost, this makes it a lead pipe certainty that the Federal Reserve will raise interest rates when they meet next week. And they'll likely hike rates by 75 basis points, the high end of projections.
Beyond that, it will probably mean they'll do the same at their next September meeting.
The Federal Reserve Branch in New York places the current Fed funds rate at 1 ½ to 1 3/4%. This hike will top out short-term rates at 3 1/4%. A rate we last saw just before the Great Financial Crisis of 2008.
As we discussed earlier, this all makes sense in the closed world of economic models. The Consumer Price Index tells us that Inflation is getting worse. Ipso facto, we must cool off Inflation by raising interest rates.
It all seems logical and perfect when you're sitting behind your terminal in an air-conditioned office in lower Manhattan.
The problem is that reality is seldom so "logical and perfect." Truth is often complex and inconclusive. And I'm afraid that's likely the case here.
The CPI presents us with two issues: Who and What Are we measuring.
Let me explain.
The Bureau of Labor Statistics began measuring the CPI over a hundred years ago. And it was well designed to measure America of the twentieth century. And it has done a credible job over the last century.
The problem is that America of the twentieth-first century is not the same. CPI does not measure prices for everyone, only those who live in cities. The BLS notes this in the footnotes.
If you live in rural America, on farms, in the military, or live in an institution is not included in their monthly measure of prices. By their estimate, they exclude about 7% of the population.
But what if that number is much higher? Remember that a significant proportion of the working population was confined to work at home during the pandemic. And that many still work at home.
Going rural is a real trend. A movement that many think is gaining momentum. Working from home has been the principal motivation for many to leave the city.
This "going rural" trend affects not only who is measured but also what is measured.
The chances are that these newly established "rural" people no longer commute. Or if they commute, do it only occasionally. Not daily like they used to.
So their use of energy and food is greatly diminished. Fuel, because they do not have to fill up the car as frequently. And food because they no longer have to grab an expensive bite for lunch or dinner and get back to their desk.
Put it all together, and here's where we are.
A significant, growing portion of the population is not part of the current CPI. And their spending patterns are likely dramatically different from Urban Americans.
By the Bureau's measure, they exclude about 7% of Americans from the monthly CPI report. But that number has not changed in some time. And it does not reflect the "work from home" movement of the past two years.
These stay-at-home, rural Americans have very different spending patterns, chiefly by purchasing less fuel and consuming lower-priced food. And food and energy are very areas that are the two major contributors to Urban Inflation.
But by relying on the currently constructed CPI, our economic decision-makers may be using a skewed measure of real overall Inflation in the country.
If, for instance, the CPI measure of Inflation is overstated by just 1% or 2% (due to population sample and spending patterns), that could lead to far different monetary policy.
Look at Wall Street's reaction when the news wires reported that CPI Inflation was just 3/10th higher than the Street had estimated. A mere fraction in higher Inflation caused markets to swoon and prices to fall.
Simply because they knew that would mean a much more hawkish Federal Reserve.
Yesterday we saw inflation at the consumer level, and to say it was ugly is an understatement. In just a few minutes, we will get the latest reading of inflation at the wholesale level as the Producer Prices will be announced. Following the heals of retail prices, producer prices are expected to have risen 8/10th% for the month of June. Or a 9.6% annual rate of inflation.
However, the big news this morning has been the earnings call by JP Morgan Chase, the nation's largest bank. It was a dismal report, with profits declining for last quarter at 28%. What's more, Morgan CEO Jamie Diamon had no soothing words for shareholders. Briefly stated, Diamon sees tough times ahead as the full effect of Quantitative Tighten descends on the bank and the economy.
The Morgan gloom has translated over to the markets, where futures indicate that equities should open about 1 3/4% lower.
Today begins the earnings season, and shortly we are scheduled to see results from Morgan Stanley, First Republic Bank, and Rio Tinto mines, among others.