The Deeper Dive: Why the Fed’s Inflation Fight is Far from Over

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The Fed has stated clearly now that it needs several more months before it will believe inflation is actually falling again, and this article explains clearly why that is.

The two major factors that gave a tiny drop in CPI last week were oil and softening housing price increases, removing earlier pressure. Apart from the decline/softening in those two items, CPI would have risen. Since those were the major items where softening or downward pressures helped the Fed out and gave stock and bond markets a tingle in the seat of their pants, I’m going to lay out what is coming in those prices, and it is not likely good for the Fed’s fight.

Getting crude about CPI

Oil, I’ve been saying, is more likely to rise right away, as the summer travel season gets going, than to keep falling. That is elementary because rising in price during the northern hemisphere’s summer is oil’s common pattern because travel in the summer by jet and by car and by RV and by ship all increase in the nations with the largest populations on earth and the most travelers.

In today’s news, it looks like we see that happening:

U.S. crude oil rallies more than 2% to top $80 per barrel, adding to last week’s gains

West Texas Intermediate surged nearly 4% last week, snapping a three-week decline and its best weekly performance since early April. Oil prices are rising on expectations summer fuel demand will draw down inventories and tighten the market in the third quarter.

When so much of the drop in CPI was due to oil prices falling, markets were foolish to think the little wiggle downward in CPI meant anything to the Fed (or to the rest of us who buy gasoline or diesel), as oil is highly likely to reverse that move this month. Today’s news seems to indicate that is happening.

That’s not a given, though:

Gasoline demand from summer driving season need to improve dramatically in order for economic fundamentals to support the move higher.

That is because recessionary economic factors right now are decreasing oil demand in some areas for non-seasonal reasons. If much of the world continues to slowly sink into recession, then oil demand may fall in the summer for reasons having little to do with changes in travel. Still, West Texas Intermediate over $80 per barrel today crosses a significant level, and, as I keep saying, oil prices into everything else. It affects all prices down the road.

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In general, however, it is usually safe to say, as some are now,

this market is likely to get tighter as we go deeper in summer,” Croft told CNBC’s “Closing Bell: Overtime” on Friday.

That’s what it usually does, so that’s one big reason why the monthly dip in CPI, which did not bring the year-on-year measure of CPI below its 8-month-long, upward range, did not cause me to leap to the conclusion, as markets did, that the Fed is back on track with fighting inflation. Since the Fed ignores oil’s impact on inflation for the very reason of this volatility, it is also likely why the latest reading in CPI did not stop the Fed from moving its hope for a first interest-rate cut further out of reach at its June FOMC meeting.

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However, the second factor that helped CPI will likely continue to help CPI a little longer, and it could outweigh the change in the direction of oil during the summer months. We know housing is going to actually fall as a measure in CPI for a few months, but we also know it is going to rise after that to an even higher level at a faster clip, helping some in the short term but leaving much to be desired in the inflation battle over the long term. In the following section of this Deeper Dive, I’ll show clearly to paying subscribers how knowable that is, but I wanted to give the oil factor freely to all.


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