What You Missed
The latest CPI report painted a starkly different picture of the economy than what many were braced for. YoY inflation landed at 2.7%, a significant drop from the 3.1% many economists predicted. MoM changes were also tamed, going up just 0.2% instead of the predicted 0.3%.
On the ground, however, the mood is much grimmer. Multiple consumer confidence reports have plummeted to record lows, highlighting a deep-seated negativity across the country. Yet, what’s even more confusing is the latest GDP reports, which showed unexpectedly strong growth of 4.3% for Q3, powered by strong consumer spending.
My Thoughts
The elephant in the room is how much we can actually trust these numbers. Between the recent government shutdown and the resulting delays in BLS data, this CPI report definitely need to be taken with a grain of salt. Just how big, though, no one knows. While it has been some time since the shutdown ended, data distortion is a real possibility. That said, I find myself wondering if a simple data lag could really account for such a massive reduction in inflation measures. Regardless of the noise in the data, the trend does seem to point toward cooling price activity.
The real challenge is making sense of these mixed messages. Inflation is cooling, yet consumer sentiment is in the gutter. Unemployment has crept up to 4.7%, yet spending remains extremely strong.
One potential explanation for this came during the last bank earnings. Bank of America reported credit card spending hitting record highs, but they added an important nuance: the K-shaped reality. While high-income households are spending aggressively, especially on housing and large purchases, lower-income households’ spending has stagnated. This is probably why we can have great GDP growth but simultaneously have record low sentiment.
So, where does this leave the Fed? I think it’s an extremely strange situation. On one hand, cooling inflation and an ever-stagnant labor market make a rate cut look like the logical move. On the other hand, with GDP growth at 4.3% and spending still hot, another cut could overstimulate the economy and tip us right back into an inflationary spiral.
The Fed is facing immense pressure from the markets and the President to keep cutting, and if I had to guess, I would say we are dead set on another one coming soon. But given these conflicting signals, it is far from being the unequivocally correct move. It’s a tightrope walk, and the margin for error is getting thinner.
Investing IQ 
Leave a comment