Bob’s Journal for 4/20/23

How to Predict the Consumer Price Index

The 12-month change in the Consumer Price Index (CPI) is almost certain to be less than 4% in a few months.

The issues are how close the CPI will get to the Fed’s target of 2% and how long it will stay there. Because the CPI’s 12-month rate of change is a simple calculation, we can use past data to estimate its likely range over the next few months.

The CPI peaked at a little over 9% in the June 2022 report. Since then, the 12-month rate has been declining slowly but steadily to 5.0% through March (5.6% for the core CPI), as reported last week.

The big monthly spikes that occurred early in 2022 are falling out of the 12-month numbers. Those spikes were consequences of the invasion of Ukraine and its ancillary effects on prices of commodities and other goods. The regular shutdowns of parts of China resulting from its COVID-19 policies also were causing price spikes.

Absent similar new events, the numbers for each of the coming months should be closer to historic norms of less than 0.5%. That makes it easy to forecast the range of 12-month CPI numbers for the next few months.

If the monthly increases between now and June (reported in early July) are 0.4%, the 12-month CPI would be 3.16%. Monthly increases of 0.2% would bring the 12-month CPI to 2.34%.

But that doesn’t mean inflation would be under control and the Fed can begin reducing rates.

Core inflation has shown itself to be sticky, or persistent. The monthly CPI numbers could settle in at a level that keeps the 12-month numbers above 3%, or even higher.

For example, if the monthly increases average 0.4% (well within the recent range), the 12-month CPI would be between 5% and 6% at the end of 2023.

Expect the 12-month CPI numbers to decline over the next few months, likely triggering much optimism in stock and bond markets. But a rebound in the number is likely later in the summer through the end of the year, which could change market sentiment.

The Oldest Full-Time Employees Work the Most

The oldest full-time employees are likely to work longer hours than all the younger full-time workers.

Those are the results of a monthly survey of U.S. individuals by Bespoke Investment Group, called the Bespoke Consumer Pulse.

Among all workers, those ages 75 and older work an average of 29.8 hours per week. That’s the lowest of any age group. Those 18 to 24 were next lowest at 31.8 hours per week. The 65- to 74-year-olds were third lowest, working 33.8 weekly hours.

But when only full-time employees are considered, those 75 and older work the most hours per week, 43.0. The next-highest group are 55- to 64-year-olds, working 41.4 hours. Everyone younger than 45 works less than 40 hours per week on average.

Bespoke said in future surveys it plans to ask why the older individuals work those hours. Do they need the money, or do they enjoy the work more than retirement? Or is it something else?

Money Doesn’t Really Affect Happiness, And You Shouldn’t Care

The age-old question of philosophers and financial analysts is: Does more money increase happiness?

For years, the consensus answer was: Yes, but only to a point.

The landmark research on the issue found that happiness doesn’t increase much once a person’s income exceeds $75,000. That 2010 research was led by two Nobel Prize winners, Angus Deaton and Daniel Kahneman, which is one reason many took it as definitive.

But the conclusion was challenged in 2021 by Matthew Killingsworth of the University of Pennsylvania. His research found that happiness does increase when incomes rise above $75,000 but at a slower rate once income passes that level.

Recently, Kahneman and Killingsworth collaborated with Barbara Mellers to resolve the conflict between the two studies.

The new research concluded that happiness does increase when incomes rise above $75,000 for most people, but not for everyone.

Higher incomes don’t improve the happiness of people classified as the 20% least happy of the population. Once those people are excluded from the data, higher incomes do, on average, continue to increase happiness.

The unhappy people have their happiness increase as incomes rise to $100,000, but incomes above that level don’t increase happiness for that group.

But here’s the really important point. The median happiness levels on a 100-point scale don’t differ a lot for households with incomes of $15,000 and those with incomes of $250,000.

In other words, higher incomes can increase happiness but not by a lot. Other factors tend to affect happiness more than money does.

Other research found that family circumstances and health have significant influences on happiness for most people. Those factors can have a stronger influence than money.

Keep in mind that these studies focus on median happiness and what affects it. The importance of the factors might be different for you.

Other research I’ve read says these studies miss the real findings.

One finding is that most people have a happiness set point. Changes in money, health, or family circumstances might change a person’s level of happiness, but the change will be temporary. Absent additional changes, a person’s happiness level will move back toward their set point, or base level.

Another point is that happiness shouldn’t be the focus. Happiness is an emotion and is temporary.

It is better to focus on longer-term qualities, such as satisfaction, purpose and fulfillment.

To some people, these are the same as happiness. But others argue these other qualities are more long-lasting and stable than a superficial and temporary feeling such as happiness.

People should focus on being satisfied and content instead of being happy. For more details, do an internet search such as: What’s more important: happiness or satisfaction?

The Data

Housing starts declined 0.8% in March after rising 7.3% in February.

Single-family home starts increased 2.7% and rose to a three-month high, while multi-family home starts declined 6.7% for the month.

Building permits declined 8.8% in March after increasing 15.8% in February. The number of permits declined to a little more than the 31-month low reached last December.

Single-family home permits increased 4.1% to a five-month high while multi-family home permits declined 22.1%.

Retail sales declined 1% in March after dipping 0.2% in February. Excluding autos, sales still declined 0.8% in March (unchanged in February). And excluding autos and gas, retail sales slid 0.3% in March after being unchanged in February.

Industrial production increased 0.4% in March, following a 0.2% gain in February. Over 12 months, production is up 0.5%.

Manufacturing production was down 0.5% in March and 1.1% over 12 months.

The Consumer Sentiment Index from the University of Michigan rose to 63.5 for the first half of April from 62 at the end of March. Both expectations and assessments of current conditions improved in the first weeks of April.

The Producer Price Index (PPI) fell 0.5% in March after being unchanged in February. March’s change is the biggest monthly decline since April 2020. A lot of the decline was the result of a fall in gasoline prices.

Over 12 months, the PPI was up 2.7% through March, a big drop from 4.9% at the end of February and the lowest level since January 2021.

The core PPI, which excludes food and energy, declined 0.1% in March after rising 0.2% in February. Over 12 months, the core PPI is up 3.4% through March, down from 4.8% through February.

The Empire State Manufacturing Index improved to 10.8 in April from negative 24.6 in March. This is the first improvement in five months and the highest level since July 2022. The new orders index jumped to a one-year high.

Optimism among homebuilders increased a little in April, according to the Housing Market Index from the National Association of Home Builders (NAHB). The index increased to 45 from 44 in March. This was the fourth consecutive month of increases and the highest level for the index since September 2022.

New unemployment claims increased by 11,000 to 239,000 in the latest week.

Continuing claims, which lag a week behind new claims, declined to 1.810 million from 1.823 million.

The Markets

The S&P 500 rose 1.10% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.86%. The Russell 2000 increased 0.50%. The All-Country World Index (excluding U.S. stocks) added 1.52%. Emerging market equities improved by 0.43%.

Long-term treasuries lost 2.82% for the week. Investment-grade bonds declined 0.66%. Treasury Inflation-Protected Securities (TIPS) fell 1.00%. High-yield bonds gained 0.27%.

In the currency area, the U.S. dollar declined 0.29%.

Energy-based commodities increased 0.34%. Broader-based commodities rose 1.49%. Gold was unchanged for the week.

Bob’s News & Updates

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