Last week, I promoted tonight’s 7th Annual Investor Social by showing some of the slides that I had to cut from the presentation.
Since we are at capacity for the ballroom, I was scolded and told to do it again, but I’m breaking the rules because I said I would show more today! Plus, I think it’s okay to come to the show as long as you’re okay standing in the back. It should be fun!
These next three slides are about inflation. The first one shows a breakdown of the Consumer Price Index (CPI). It’s more common to break it down into four parts: goods, services, food, and energy.
But shelter is the biggest part of the whole index, dominates services and is pretty much the whole story right now, so I made that its own segment.
The first thing to note is that energy prices add and subtract from headline CPI all the time—they were a drag in 2024 and a boost in the pandemic.
And that’s the second thing to note—inflation was pretty steady outside of energy before the pandemic, and then, BOOM, everything hit.
The next slide removes food and energy, so it’s a look at what we call core inflation. Before you email me to say that we all eat and use energy, I know, I know.
It’s useful to look at both core and headline inflation, but in the end, food and energy add a lot of noise but don’t change much over the long run.
Without food and energy, you can see much more quickly that good inflation was hit during the pandemic, but that’s pretty much gone away. I think of that as the supply chain and logistics problems. And, as the pandemic went away, so did goods inflation.
Services inflation minus shelter barely registers, but the next slide exposes the culprit on the current high inflation: shelter.
Shelter inflation is tricky because it’s a calculation, an estimate. If you want to know the price inflation for paper clips, it’s pretty straightforward: you check prices at a bunch of places, do the same thing at some point later, and then compare the differences.
Shelter is much more complex and somewhat controversial. The government calculates ‘owner’s equivalent rent,’ which is supposed to tell you what a homeowner would pay in rent on the home they own. Zillow has a Rent Zestimate, and while I’m sure the government does it differently, it’s the same idea.
Part of the current shelter inflation is a well-known timing problem – the data is months behind because landlords only update rents once a year upon renewal. When the input data is slow, so is the output data.
Shelter inflation is still coming down, but the pace is decelerating. Is that timing, or is there still a lot of inflation in housing? Both. How much is the calculation, and how much is the inflation? I don’t know, but housing seems expensive when I look at home prices in suburban St. Louis. I can’t imagine what it’s like in Austin, Texas, or San Diego – fortunately, I don’t have to.
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Before I sign off this morning, I want to take a moment to recognize the life of Al Goldman, the Chief Market Strategist at A.G. Edwards. I knew of him as a teenager because I attended presentations my parent’s broker put on.
In my 20s, I met and became good friends with his son and the entire family. I spent many occasions with Al and enjoyed talking markets with him. I even asked if I could interview him in our quarterly newsletter, but it never came to pass.
I wanted to write like he did, but I have a way to go since he appeared in hundreds of newspapers nationwide. He also appeared on Louis Rukeyser’s Wall Street Week on PBS, one of my favorite shows growing up (though I never saw him on that show).
Here is a link to his obituary. May his memory be a blessing.
