Pro Perspectives 3/12/24






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March 12, 2024

We had the February inflation data this morning.

It looks like this …

As you can see, the headline Consumer Price Index (CPI) has stalled around the 3% mark.  And it happens to have leveled off from where the Fed made its last rate hike.

The speculation has been that the move from 3% to 2% will be longer and more difficult than the move from 9% to 3%.

But the Fed’s favored inflation gauge, the Personal Consumption Expenditures Price Index (PCE), has had a much cleaner path.  At the current 2.4% level, it’s not far from the Fed’s target.

What’s the story?  As we’ve discussed over the past few months, the insurance component of CPI has been a significant drag.  Jerome Powell said the same recently.

Take a look at the direction of household insurance …

And the direction of auto insurance …

As we’ve discussed here in my daily notes, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was almost a decade’s worth of money supply growth (on an absolute basis), dumped onto the economy in a span of two years.

That inflated asset prices.  And the insurance industry spent the past two years raising the price to insure those higher priced underlying assets.  But as we’ve also discussed this is a lagging feature (likely a late stage feature) of a hot inflationary period.

If we just pull out shelter from the consumer price index (which is influenced by changes in insurance premiums), CPI drops below 2%.