Modified and Weighted Inflation Data Shows 7.5 Percent Annual Increase, Highest Increase in 40 Years

The Bureau of Labor and Statistics (BLS) released the January inflation data [DATA HERE] along with the yearly data from 2021.   The “first round” of retail grocery price increases starts to surface; but this is only the first round.  January inflation was actually much worse than the bad data inside the BLS analysis.

Additionally, the BLS readjusted the weighting for relative price importance, putting added weight to urban economic priorities (ie. food at restaurants), which indicates their intent to downplay the scale of inflation overall.  The topline statistic of 7.5% annual inflation (year over year) is bad; however, because of weighting that figure belies the bigger issue, it’s actually much worse.  In January alone inflation jumped 0.8% (unadjusted), primarily driven by the first-round of 2022 consumer inflation that preexisted since early December 2021.

To give an idea of how much prices have increased, we modified BLS Table 1 to take out some noise.  Look at the single month of January (red box).

Look at January “electricity” price increases.  A jump of 4.5% in one month alone, and keep in mind the BLS puts far less importance on electricity than “food away from home”.

In fact, the weighting for economic importance of restaurants is 5 times greater than the electricity to power your house.

Always keep in mind inflation data is backward looking.  So it is a capture of the price increase at a former moment. In this example the pricing survey was early January.

The timing part is important because gasoline has jumped again since this survey was completed.  The BLS data only has gas increasing at 0.1% in January; in reality it increased much more.

You can see the statistical smoothing to present the softest inflation data by looking at Food at Home, Meats, Poultry and Fish.  The actual rate of inflation in that category is 40%+ at retail.  The BLS deemphasizes the price increase by putting less economic importance on the category and they come up with a 12.2% increase, one third of the actual price we are feeling.

Despite the BLS putting less emphasis on food we purchase to make at home, the overall scale of 7.5% aggregate weighted inflation would indicate to us that real inflation on all items is running around 23 to 28%.

Think about the inflation you are feeling at or near 20%, then compare that outcome to the 1970’s when we thought things were bad with 15% inflation.

On the positive side, well, actually just less bad side, some of the MSM is starting to realize the importance of looking at unavoidable inflation (food, fuel, energy) as the truer measure of the pain consumers are feeling.

(NBC) – High prices continue to hit American shoppers as inflation rose faster than expected to 7.5 percent for the month of January over the previous year, exceeding the 40-year high set in December.

The latest release of the monthly Consumer Price Index by the Bureau of Labor Statistics on Thursday shows that price increases were most pronounced in food, electricity and shelter.

The indexes for food and energy each rose 0.9 percent, and the index for shelter rose 0.3 percent.

The “core” consumer price index, minus the more volatile food and energy indexes, rose 0.6 percent in January, the same as in December.

Indexes for household furnishings and operations rose 1.3 percent, used cars and trucks increased by 1.5 percent, medical care went up 0.7 percent, and apparel increased by 1.1 percent.

The rise in consumer prices appears to be sticking around, despite earlier claims by Federal Reserve Chair Jerome Powell that the effects would be transitory. (read more)

A Gallup news survey [DATA HERE] indicates that eight out of ten Americans expect higher prices and continued rising inflation, as the working class can see the through the smoke and mirrors of the Biden

Overall, there are multiple datapoints that show the economic quagmire that is taking place right now.  Gasoline continues to rise in price, as oil costs continue to skyrocket as an outcome of Biden energy policy.  Food store prices have only just begun to show the higher prices that are built into the replenishment process.

Newly arriving goods overall are at a much higher price that previous inventory.  The 30, 60 and 90-day terms of purchase order fulfillment are now reflecting the cumulative cost increases at every stage in the supply chain.  Inbound prices to retail are still climbing. This is an economic quagmire created by inflation that cannot be avoided.

Fuel, food, home energy and home prices overall are rising.  As a result, durable good spending has contracted.  CTH has pointed out this dynamic for almost five months; however, the actual data is difficult to extract, because the scale of government spending in 2021 has clouded all of the economic indicators.

The official government inflation statistics at 7 to 9% do not accurately reflect the real inflation being felt by consumers, which is in the 25 to 40 percent range for highly consumable products.  If you look around your local community, it is not difficult to see that working class Americans have modified all of their spending priorities to deal with the food, energy and housing inflation that cannot be avoided.

The bottom line is this. Despite the indicators, which have been made useless by massive amounts of money pumped into the economy, we have been in a contracting economic position since mid-2021.

This is a very important aspect to accept when you are thinking about your current financial position, and/or what you may need to do going forward.

If you recognize the absence of real economic activity surfaced mid-2021; and if you accept that absence was hidden by economic activity generated by the spending of government funds injected into the economy; then you can better predict the depth of the hole that was covered up by government intervention.

Accepting that reality then the irreconcilable data starts to make things make sense:

♦ November 2021 retail employment hiring was down.  Why?  This should have been the pre-holiday hiring spree.  However, retailers saw something in their brick and mortar sales that stopped them from hiring.

♦ The third quarter U.S. productivity (June, July, August) was down 5%.  Why?  If everyone was spending their COVID stimulus, why wasn’t manufacturing making more stuff?  The reality was that wholesalers were clearing out product inventories as they knew inbound replacements would cost more…. so, they replaced less.

♦ Inflation wasn’t “transitory”?  Why?  Because the inflation was driven by the perfect storm of energy policy, monetary policy and government spending.

♦ December 2021, retail sales were lower than December 2020.  Why?  Because people bought less stuff, because people had less disposable income, because food, fuel, energy, home heating and home living costs were chewing up our paychecks and savings.

♦ The U.S. savings rate started rapidly declining.  Why?  Inflation.

♦ In the third and fourth quarter 2021, U.S. workers started quitting more (JOLT’s report).  Why?  A combination of vaccine mandate (minor cause) and people jumping jobs to get higher wages because inflation was crushing them (major cause).

The people predicting more inflation all the way through 2022 are correct.  We have only just recently seen the first wave of 2022 product inflation hitting the supermarket in the past two weeks.  There will be more waves as the prices embedded inside the cumulative supply chain have yet to surface.

However, stop and think about this overall economic situation, a real quagmire, as identified by the simple datapoints above.  The professional political class and financial pundits will never admit the Main Street economy started contracting in the middle of 2021.  From their perspective, the money pumped into the system was real.  It wasn’t.  It was all artificial economic stimulus.

Now, into this very specific -and never before experienced- economic quagmire, where we are supposed to pretend not to know things, the Federal Reserve is about to raise interest rates. (read more)