Why the Fed Is Seeing Disinflation in the Wrong Places

Summary

This script discusses the limitations of the Consumer Price Index (CPI) as an accurate measure of inflation, with a significant portion based on homeowners' estimates of their rental equivalents. It explores alternative metrics like business contacts, product sector prices, and service sector components. Economic data, including upcoming jobs reports and Fed Chair Powell's commentary, are anticipated, potentially revealing a more hawkish stance than expected. The accuracy of non-farm payroll numbers is questioned, with the household survey and workweek data suggesting a weakening labor market, potentially signaling an impending recession.

Takeaways

• 😕 The consumer price index (CPI) is a flawed statistic, with 27% of the index based on a survey of homeowners' opinions about home prices and rental values.
• 😐 The service sector component of CPI is considered unreliable as it relies heavily on imputed pricing, rather than observable prices.
• 😏 David Rosenberg suggests focusing on the prices of tangible goods, which can be more reliably measured, rather than relying on imputed service sector prices.
• 🤔 The Federal Reserve is increasingly shifting its focus towards anecdotal evidence from business contacts, rather than solely relying on government data.
• 😳 Recent Beige Book reports suggest that the corporate sector is experiencing diminished pricing power and reduced ability to pass on cost increases.
• 🧐 While the headline non-farm payroll numbers may appear strong, the household survey and the contraction in full-time jobs paint a different picture of the labor market.
• ⚠️ The divergence between the non-farm payroll headlines and the workweek, which is already at recessionary levels, suggests that the labor market may not be as robust as it seems.
• 🔍 David Rosenberg expects Fed Chair Jerome Powell to sound hawkish in his upcoming remarks, despite market expectations for rate cuts.
• 💭 The market has already walked back its expectations for rate cuts, aligning more closely with the Fed's December commentary.
• 🤨 Rosenberg believes that the recession is likely staring the economy in the face, despite the current consensus narrative of a robust economy.

Q & A

What is the main issue raised regarding the Consumer Price Index (CPI)?

The main issue raised is that the CPI is flawed because 27% of the index is based on a survey asking homeowners how much they think they could rent their homes for, which is known as the "owner's equivalent rent" component.

According to David Rosenberg, what inflation series should be paid attention to instead of the CPI?

David Rosenberg suggests paying attention to the prices of tangible products that you can "see, touch, and feel" instead of relying on imputed prices in the service sector, which he considers unreliable components of the CPI and the PCE deflator.

What is David Rosenberg's perspective on the upcoming Federal Reserve Chairman Jay Powell's commentary?

David Rosenberg expects Chairman Powell to sound pretty hawkish in his commentary, possibly more hawkish than what the market is currently pricing in. He believes Powell will try to walk back some of the more dovish expectations from the December meeting.

How does David Rosenberg view the nonfarm payrolls data?

David Rosenberg is skeptical of the nonfarm payrolls data, as he believes that a significant portion of the growth in nonfarm payrolls last year came from a model adjustment (the "plus factor") rather than the actual survey. He suggests looking at the household survey and the contraction in full-time jobs over the past six months as a better indicator of the labor market's health.

What does David Rosenberg point out regarding the workweek data?

David Rosenberg highlights that the workweek data is already back at recession levels, which contradicts the narrative of a robust labor market based solely on the nonfarm payrolls headline numbers.

What is David Rosenberg's overall assessment of the current economic situation?

Based on his analysis of the labor market data and other indicators, David Rosenberg believes that a recession is "probably staring us in the face," contradicting the consensus narrative of a robust economy.

Why does David Rosenberg suggest focusing on product prices rather than service prices?

David Rosenberg suggests focusing on product prices because they are the prices that can be seen, touched, and felt, and are therefore more reliable than the imputed service prices in the CPI and PCE deflator, which he considers to be unreliable guesswork.

What does David Rosenberg expect to happen with product prices in the next year?

David Rosenberg expects product prices to be in a deflationary momentum over the next year, based on his assessment of diminished pricing power in the corporate sector and the ability to pass on cost increases.

How does David Rosenberg view the Fed's focus on the service sector?

David Rosenberg expresses concern that the Fed is overly focused on the service sector, which he considers to be the most unreliable component of the CPI and PCE deflator due to the imputed pricing and guesswork involved.

What is David Rosenberg's stance on being an economist?

David Rosenberg has a lighthearted perspective on being an economist, saying that "it's always a great time to be an economist" and that economists need to "fasten your seatbelt and stay at our desks 24/7" to keep up with the ever-changing economic landscape.