Moneybeat - Inflation distortion

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

DAVID BAHNSEN, GUEST: Well, good morning, Nick. Good to be with you.

EICHER: Well the government gave us a new number on inflation, lots of superlatives attached to it. It’s the highest inflation in 40 years—going all the way back to 1982—the Consumer Price Index for January, the CPI, up 7-and-1/2 percent year on year versus January 2021. So that comes on the heels of a 7 percent number December to December and that was also a 40-year-high.

Now last time we talked about CPI, you said we really need to look at the bigger picture because the one-year comparison takes into account a real outlier year, the covid year. So should we throw out January 2021 as an inflation comparison?

BAHNSEN: Yeah, I don't think that one has to throw out the COVID year - I just think they have to include both the COVID deflationary year and then the reflationary recovery year at 21. And so when you take an annualized average over 24 months, instead of over 12 months, you still see price level that is higher than it was pre COVID. So it's not to deny the narrative of higher prices. But it is to put things in perspective. And what I see is a two year number that is about 4%. Core CPI three and a half percent, still above trend, still basically double the sub 2% inflation that they had been dealing with pre COVID. But when you see that used cars and trucks are 23% per year, for the last two years, you get a feel for how distorted some of the numbers are. Food prices are up, energy prices are up, consumer goods are up, but they're all up in a reasonably normal bandwidth. The used cars and trucks and new cars too, for that matter, are really distorting the numbers. So why does that matter? People do buy cars and trucks. It is inflation, when the prices are higher, right, right, right. The only reason I say matters is because it helps us evaluate if the inflation rate is going to continue going higher or begin to go lower. Because there is a type of inflation that can be very ‘sticky’. And that's actually literally an economic term. And then there's a type of inflation that can be less sticky. And I think that those of us analyzing this objectively look at car and truck numbers, and you start to get a better feel for where the inflation number is and what the causative factors are around it. But I think with a more nuanced view, one can get a better understanding of why the inflation rate is very likely to go lower later in the year. However, the energy factor, which is probably the most common data use is everybody - wealthy, poor, middle class, unemployed, employed - everybody uses energy. And I think that those numbers being higher, speak to very specific supply demand characteristics with oil and gas. And by the way with electricity use, and I think that that is something people should be very focused on.

EICHER: Is there anything President Biden can seriously do about this? Is there a policy button to push? And I ask because right as the CPI inflation number came out, the president was in Virginia touting Build Back Better as a solution.

BAHNSEN: Well, first of all, Build Back Better has nothing to do with inflation. It's it doesn't even exist anymore. It's dead and gone. build back better was largely a very, very expensive series of transfer payments. So there's no real serious argument that that was going to go help get ports reopened and truck drivers back to work. The policies from March through September of our federal government, in paying people more money to not work, exacerbated labor shortages, it further entrenched a cultural trend towards people leaving the workforce. All of those things are problematic here. Could he right now do much to reverse that? No, I think that in all seriousness, the number one thing he could do is on energy. I've talked about this with you, and I continue to beat this drum. You want greater form of production - it does not take away profitability in the supply demand. fulcrum, these companies can still make money at $50 oil, let alone the more realistic 65 to 70, they can get a down deal. But now that we're well above 90, I think that that is a price escalation that is controllable because of bad policy. And it is something that could be politically beneficial to the President if he were to reverse, but he won't. There is too strong of a pull from the other side of his political base that is driven with very ignorant environmental extremism. And so I think that that part he’s very well entrenched in. So I can't say that there's an easy thing for the White House to do. But I can certainly say that him going and delivering messages that miss the mark as to where we are and what we do from here is problematic.

EICHER: You mentioned truck drivers and I’ve wanted to know what you have to say about the trucker protest up in Canada, is that an economic story, do you think?

BAHNSEN: I mean, I don't have much to say about it economically, I think it has become more of a political and you could argue cultural story. And so we're watching that sort of play out. But primarily, this is more a standoff between Canadian political leadership, and a sort of revolt movement that is rooted in wanting more political freedom around vaccine. So I think it's a big story, but not so much something that's affecting daily economic data.

EICHER: All right, David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group. He writes at DividendCafe.com, daily email newsletter on markets and the economy. David, thank you.

BAHNSEN: Thanks for having me, Nick.

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