Inflation is “Cooling.” Is it Really?

There has never been such a difference between the narrative and reality before. Long gone are the days when the published data could be taken at face value and the mainstream media had the readers’ best interest in mind.

Still, in the short term, the financial markets are primarily driven by sentiment. Stock traders are willing to set common sense aside if a data set fits the story they want to hear. In other words, confirmation bias is as strong as ever in 2024.

But let’s back up for a moment. Large-cap stock traders were evidently willing to disregard the Bureau of Labor Statistics’ (BLS) reading of the Producer Price Index (PPI) for April that came in unexpectedly hot. Specifically, April’s PPI increased 0.5% year-over-year vs. the 0.3% that economists had expected and the 0.1% year-over-year decrease in March.

Some financial traders might not pay much attention to the PPI, but they should. If producers of goods are paying more on their end, the higher input costs are bound to get passed on to the consumers at some point. It’s not always an immediate impact, though, so we’ll just have to watch and wait for the other shoe to drop.

Federal Reserve Chairman Jerome Powell also made a stark statement this week that the market largely ignored. At a panel in Amsterdam, Powell said, “We did not expect this to be a smooth road, but these [inflation readings] were higher than I think anybody expected… What that has told us is that we’ll need to be patient and let restrictive policy do its work.”

In other words, Powell and the Fed have no inclination to lower interest rates anytime soon. It’s a major letdown, or at least it should be considered one since the market had previously penciled in half a dozen interest rate cuts for the year. The market will now be lucky if it gets two rate cuts in 2024.

At the same time, the mega-cap stock perma-bulls are counting on the American consumers’ spending habits to save the day. The problem is that people are already maxed out on their credit cards and loans with U.S. household debt now reaching $17.69 trillion, the highest recorded level in history.

As usual, they know how to use deceptive data to pretend that the U.S. consumer is “strong.” U.S. retail sales increased 2.7% year-over-year in April, but after adjusting for higher prices, they actually declined 0.7%. Both of these figures are far below the historical averages of a 4.7% nominal increase and a 2% real (post-inflation) increase in retail sales.

With large-cap stocks hovering near all-time highs despite the evident cracks in the economy’s foundation, traders continue to cherry-pick the data they like the best and ignore the rest. They also don’t seem bothered by the Sino-U.S. trade war that’s likely to keep inflation high for the foreseeable future.

The current presidential administration is going full steam ahead with sweeping U.S. tariffs on Chinese goods that will raise the costs of $18 billion worth of Chinese imports. The tariffs are wide-ranging and include Chinese semiconductors, steel, aluminum, solar cells, electric vehicles, batteries, critical minerals, ship-to-shore cranes, and various medical products.

Just think about how many of the products in your house are either fully or partially made in China. The administration’s actions are bound to impact consumer prices in the U.S., and the president admitted that he fully expects China to retaliate in the trade war that he just started.

It’s another nail in the coffin of the narrative that inflation is somehow “cooling” in the U.S. They can spin that story all they want, but the signs of runaway inflation are everywhere. Just look at how unaffordable housing has become with a nearly $80,000 annual income now needed to afford a typical U.S. rental.

Nonetheless, the media will describe inflation as “cooling” because the Consumer Price Index (CPI) increased 3.5% year-over-year in April. That’s a tiny bit less than the 3.6% CPI increase in March, but it doesn’t mean that prices are coming down; it only means that prices grew at a very slightly slower pace for one month.

Large-cap stock traders welcomed this data with a relief rally, but that’s just short-term sentiment and not a reflection of what’s actually happening in the real world. It might not happen immediately, but the gap will close between asset prices and economic reality. Your portfolio will hopefully be ready for the reckoning.