Gary Brode of Deep Knowledge Investing and Robb Fahrion of Flying V Group discuss the 5 Things to Know in Investing This Week: The Fed Does Not Have Inflation Under Control Issue

-CPI rises. PPI rises. Fed about to cut again. What could go wrong?

DKI Summary:

On Wednesday, we got the November Consumer Price Index (CPI) report which showed an overall increase of 2.7% for the last year and 0.3% for the month (annualizes to 3.7%). That’s above last month’s 2.6% and above the prior month’s 2.4%. The Core CPI, which excludes food and energy, was up 3.3% vs last year and up 0.3% from last month. That 0.3% annualizes to 3.7%. Those figures were in-line with expectations and consistent with the prior month. On Thursday, we got the Producer Price Index (PPI) which measures wholesale pricing and is a leading indicator of future CPI releases. It showed an annual increase of 3.0%, up from last month’s 2.6%. It was up 0.4% for the month which annualizes to 4.9%. Core PPI increased 0.2% and was up 3.5% on an annual basis. This was higher than anticipated driven by a substantial increase in eggs, dry vegetables, poultry, and fresh fruits. (Insert constant reminder that we believe food inflation to be understated.)

DKI Takeaway:

When the Fed lowered the fed funds rate in September, and again in November, DKI warned of the “Arthur Burns” problem. Burns was the Fed Chair who reduced the fed funds rate while inflation was on the way down, but not under control. That’s where we are now with the Fed cutting into above-target and rising inflation. With Congressional overspending (regardless of which party is in control), there’s continued inflation-causing stimulus. Other inflation metrics have risen in recent months as well. President-Elect Trump has made it clear that he wants a more accommodating Fed. It will be interesting to see if the Powell-led Fed, which cut rates just before the election, will push back with a pause or higher rates in the next year. On to next week, the Fed will likely go against our analysis and cut rates another 25 basis points. We’d offer them a complimentary subscription to DKI, but don’t trust them to use it.

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This week's written version of the 5 Things with graphs:

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