Hello Everyone – Colleen suggested that I write about inflation today. Is it really running at 8.3%? My answer is no….not anymore, and not based on the most recent data. She asked me to explain this, and she told me to call it Economics 101. Ok I said, I’ll try. Here it goes.
Inflation measures the change in prices over time. This means we need a beginning date and an ending date. The government tries to measure inflation using the CPI, or Consumer Price Index. It takes an average price for a basket of goods at point A and then measures it again at point B, and then calculates the change in prices. That is how we generally like to measure inflation. But for what time period? Well, typically over 1 year and then also over 1 month. How did prices change in the last year and how did prices change in the last 30 days. This is an important distinction.
The headline CPI number reported yesterday was an 8.3% change year over year. That is from last August to this August. People saw this and how it was perceived as worse than expected and they started to sell, and sell and sell yesterday. But why I ask? We already knew this. Prices went up the most from last fall to the middle of June. So the year over year measurements are going to look bad for a while, because it keeps measuring that same change even if prices have flattened out. We will probably see bad year over year comparisons for most of this year actually.
However, that was then, this is now. I want to know what’s happening now. That’s where the month to month change comes in handy. For instance, what did that basket of goods cost in July, and what did it cost in August? Well, the last 2 months have shown a significant improvement. From June to July prices gained 0%. From July to August prices increased .1%. Multiply that by 12 and you get the current annualized inflation rate, or about 1.2%. That’s a far cry from 8.4% isn’t it. So the best numbers right now are the month to month in my opinion. If they stay flat, the year over year CPI will start to come down in time.
Keep in mind. many items will never go back down! They are sticky. They will stay high. But as long as they stop going up, then inflation would be zero, and that’s what the month to month numbers are showing us right now. BUT, we need more of these types of months. Two months does not make a trend. The jury is still out. September CPI will give us more info. I will keep you posted!
The sooner we can get inflation under control without causing a big recession, and also end the war in Ukraine, the sooner we can get things back on track in the financial markets!
Best Regards,
Mike
Month to Month changes in the CPI from 2012 to August 2022