Inflation Numbers and Why January Reports Are Particularly Important

We talk a lot about inflation, the Federal Reserve’s response and how it relates to our preferred stock, SPDR S&P 500 ETF Trust, SPY.

The Consumer Price Index (CPI), released monthly, is a widely used indicator to measure price changes for a basket of goods and services over time. There is no magic to this number. Simply put, the Bureau of Labor Statistics’ (BLS) economic assistants either visit or call retail stores and other establishments throughout their geographic locations and collect price data for their “basket” of goods and services. The assistants collect this data and commodity specialists examine it for accuracy, making any statistical adjustments as necessary. The CPI is the benchmark indicator for inflation, with rates being the changes to the CPI over time.

The Producer Price Index (PPI) is another indicator, released on the second Tuesday of each month, and takes data collected by the BLS from domestic producers, weighing in on each product’s value of shipments, change in selling price and other factors. A sample of establishments are surveyed from across different industries to determine the PPI value.

The Federal Reserve’s preferred indicator is the Personal Consumption Expenditure (PCE), a measure of how much Americans spend on goods and services. This gauge is released toward the end of each month and includes durable goods such as motor vehicles and parts, furnishings, household equipment and recreational goods. Non-durable goods are also included, such as food and beverages. The difference between the CPI and PCE is that CPI measures only the out-of-pocket spending by urban households, while PCE measures the total spending on goods and services consumed by all households, including those paid for by third parties like employers.

Inflationary numbers in January carry more weight than they do at other times of the year, as they reflect outsize turn-of-the-year price resets. The beginning of the year is a natural time for businesses to re-evaluate their pricing structure and generally increase prices. Restaurants raise their menu prices, gyms boost their membership rates and private-car services ramp up their fees. Such price hikes have been especially impactful over the past three years following inflation due to the Covid-19 pandemic in 2020. Businesses tend to push prices through at logical times, including the start of the year. When the economy is strong, like it is now, consumers are more able to cover the additional costs, despite their vocal outcries of higher prices.

When inflation rears its ugly head, the numbers signal to the Federal Reserve that monetary policy has more work to do. Raising interest rates cools the economy, thereby wrestling inflation back down. We see this inverse relationship between the economy and interest rates. Reflected in the stock market, investors shy away from high interest rates and thereby sell their holdings, dropping the value of SPY.

It is for that reason that we take a serious study of anything that reflects the health of the economy. High impact retail sales and unemployment claims are also indicators we monitor to review the pressure points. For example, a lower-than-expected unemployment claims report suggests that the economy is booming and that prices may rise, pressuring the Feds to raise interest rates to curb inflation. And the cycle goes around and around.

These are just some of the topics we discuss in our exciting morning Trading Room. Combined with technical indicators and other fundamental considerations, we determine price action before the opening bell, then endeavor to make some money.

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