• Sean D. Emory

CPI Trends Show 3m Annualized Below 6M and 12 Month

The CPI report came out and the figure was right in line with what CPI Nowcast from the Federal Reserve Bank of Cleveland. Something we use to gauge where the CPI report is going.

You likely know our view right now that CPI as a real-time indicator for inflation is flawed given its lagging impacts and our view that deflation 12 months from now is more likely than persistent inflation. That is supported by real-time data and many others are now signing off on that notion. (other than the FED of course)

Generally having a lag in CPI is not as impactful, however when it matters, like now, it can impact important decisions. More on that in a second but the chart below is the FED Nowcast expectation.

Comparing that to the figures published today were

8.2% headline CPI year over year --- right in line with FED Nowcast

6.6% Core CPI year over year --- right in line with FED Nowcast - only 4 basis points lower

.4% headline month over month --- only 8 basis points above FED Nowcast

.6% core month over month --- only 9 basis points above FED Nowcast

So assuming this is the gauge, which is widely used, the expectation versus the reading should have been subdued. Obviously not the case.

We went ahead and looked at the main components and tried to measure the overall trends in CPI. We are showing the main CPI report along with calculating the 3-month and 6-month monthly averages. The green dot indicates whether the 3m is trending below the longer average of 6m. As you can see most all indicators are trending lower (some more than others).

We also compared and annualized both the 3-month and 6 months. We obviously get the same trend indication. That is that the shorter-term trend on inflation is slower than the more extended average.

The last column shows whether the 3-month annualized is above or below the current year-over-year change in CPI. The green dot indicates that the trend is below, which suggests a clear moderation in current and future year-over-year readings.

To be clear, we don't think an 8% inflation reading is good, we believe that the trend is actually moving in the right direction and when combined with high-frequency data (real-time), there is evidence everywhere that inflation is moderating. Both in CPI and much more in real-time data. Here's some more info.

Now one data point I think is important to look at in terms of explaining the lagging effect of CPI. Or even outright improper calculation going on here.

The Used Car items in CPI are showing a year-over-year increase in the price of used cars. Now we know that this is just not true.

The Manheim Used car index just showed a year-over-year DECLINE in the price of used cars, and next month is on pace to reach close to double-digit declines. Let's see how this is being calculated. Manheim uses 5 million vehicle transactions.

Let us look at CPI's method. It uses a sample of 480 cars, WHAT!

Here is the trend of the Manheim Index, which we showed last week. Manheim Used car index is seeing declines RIGHT NOW on a year-over-year basis that are approaching declines in 2008 and April 2020. Yet, CPI shows an increase of +7%.

Furthering this anomaly, the chart below compares the two and shows just how much of a gap has recently formed here. There is roughly a 10% gap between the two indicators, despite the relationship being tight for a long time.


...however, we think this concludes with CPI coming down, not the Manheim index moving higher. Manheim actually just lowered their full-year estimate for used cars to finish around -13-17% for the entire year of 2022.

Disclaimer: This is for educational purposes only and not investment advice.