CPI numbers from the U.S.-led markets to rally, leaving bitcoin in the dust as FTX shocked the crypto world. The Federal Reserve tests out a CBDC.
CPI Numbers From The U.S.
We had to skip last week’s show due to scheduling conflicts, so we missed covering the CPI numbers. This week, I read out some of the important details of the data.
October’s headline CPI change was +0.4%, almost half of the Cleveland Fed’s CPI Nowcast projection of 0.76%, and far below the industry forecast of 0.6%. It really shocked the market and stocks rallied hard.
Bitcoin’s expected reaction would have matched that of stocks if it were not for the FTX collapse happening at the time — even though FTX didn’t hold any bitcoin anyway, as it turns out. This move in thebitcoin pricewas therefore a sympathetic move with the industry. The correlation between altcoins and bitcoins won out over bitcoin’s correlation with stocks. However, that is evidence that bitcoin is oversold from a fundamentals perspective.
Shelter was the largest component in the monthly CPI and accounted for almost half of the increase. On the show, I spend some time explaining how the shelter component is designed to lag by 12-24 months. Without the addition from the lagging housing sector, CPI would have been 0.2% for the month. Annualized, that is 2.4%.
It is important to focus on the month-over-month change because that is the fundamental unit used to create the year-over-year (YOY) headline number. The YOY change does not do a good job of recognizing directional changes like peak CPI. You can think of it like a 12-month period moving cumulative change, similar to a moving average. The influence on the 12-period moving cumulative change of a sudden qualitative shift will be minimal in the first few periods. It is only after the new trend is well established that the broader 12-period average plainly communicates the data.
In this case, the YOY change in CPI is still 7.7%, even though the last four months have been 0%, 0.1%, 0.4%, and 0.4%. If you annualize the last four months, you get 2.7%, not 7.7%. Do not forget as well, that half of the recent rises are due to the lagging shelter component. It is not a stretch to say that the current rate of change in prices is under 2% on an annualized basis.