Inflation is “Cooling?!”

Inflation is “Cooling?!” Who Do They Think They’re Fooling?!

After a presidential debate that made many viewers cringe and smack their foreheads, we would certainly like to offer some encouraging news for Americans in July. That’s easier said than done because the data isn’t all positive even if the spin doctors try to make it look stellar.

The fact is that the price of just about everything is still going up, and the prices of the most essential goods and services are still out of control. Surprisingly, there really wasn’t a lot of discussion about inflation in the presidential debate even though it’s top-of-mind for Americans.

Let’s start with the headline news that Wall Street obsessed over for weeks before the event actually happened. We’re not talking about the debate but rather the Federal Reserve’s so-called “preferred inflation gauge,” which is formally known as the core Personal Consumption Expenditures (PCE) index.

According to BMO senior economist Jennifer Lee, the core PCE print for May was so great that it was “probably the best one could expect.” This says more about Wall Street’s low expectations than it does about the actual state of the economy, though.

As it turns out, the core PCE for May was up 2.6% year-over-year, which was in line with economists’ estimates. One might assume that an expectation-beating (not just expectation-meeting) core PCE reading would be the “best one could expect,” but again, people are free to spin the data any way they wish.

Perhaps Lee was focused on May’s result versus April. In particular, the core PCE for May rose 0.1% month-over-month, which is a slower increase than the 0.3% gain recorded in April.

Bear in mind that this isn’t deflation, in which the prices of products and services actually go down. This is disinflation, in which things continue to get more expensive but at a slower pace. Besides, we’re only looking at one month of disinflation, and it’s not even for the full array of essential goods.

Not everyone is as optimistic as Lee’s remarks seem to imply. Notably, the University of Michigan’s gauge of expected price changes during the next five to 10 years is at its highest level in 31 years.

Investors should take the Fed’s “preferred inflation gauge” with a huge grain of salt. It doesn’t include food and energy prices, which are extremely important to the budgets of hardworking Americans even if wealthy central bankers aren’t particularly concerned about the prices of groceries and gasoline.

If there’s any silver lining to middle-class America struggling under the weight of rising consumer prices, it’s that the Federal Reserve will have to finally lower interest rates at some point. Paul Ashworth, chief North America economist for Capital Economics, acknowledged that U.S. consumers “appear to be… finally capitulating under the pressure of higher rates” and “the return to the earlier disinflationary trend and new-found weakness in real activity are both consistent with the Fed cutting interest rates as soon as this September.”

In other words, the Fed might soon have an excuse to cut interest rates when the economy really starts to implode. It’s a slow-motion implosion that’s already in progress with plenty of warning signs for anyone willing to open their eyes.

Among these signs is the high price of fast food, which was a staple among struggling U.S. families for generations. Fast food price inflation has gotten so out of control – and the stocks of these restaurants are lagging so badly – that McDonald’s, Burger King, KFC, and Taco Bell are trying to lure customers back with a summertime “value meal” price war.

Meanwhile, the mainstream financial media is busy celebrating four weeks of minor housing price declines. If you don’t look at the big picture, you might be led to believe that a nearly 7% 30-year fixed mortgage interest rate is “progress.”

There’s not much “progress” here when mortgage rates were 3% not that long ago. Then again, the perma-bulls have to find “good news” wherever they can find it, especially during an election year.

They’ll want you to ignore the warning sign showing that U.S. jobless claims are rising. There were 1.84 million in the week ending June 22, which is up from 1.82 million the previous week. The optimists better hope for a quick turnaround because the fragile economy can’t withstand persistently negative employment trends.

All of this is happening while mega-cap stock indices hover near all-time highs. It’s a compelling case for portfolio diversification and hedging, so feel free to get your ducks in a row before the storm rolls in.