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Why is Everyone Still Twisted-Up About Inflation? Let’s Look at the Terminology.

Understand the difference between leading and lagging inflation

Everyone in the media is using the wrong terminology when discussing inflation, even Economists. Let me straighten it out.

First, let’s talk about the Consumer Price Index (CPI).

The Fed’s CPI target is 2.5%.

If we look all the way back to January 2020, the CPI was at 2.49% before deflating to 0.12% in May 2020. From there, it took until March of 2021 to get back above the Fed’s target (2.62%) – That’s ten months.

Then, as we are all aware, it just kept going and finally peaked in June of 2022 at 9.06%.

That took 15 months.

Now, 12 months after the peak, it’s down at 2.97% and that’s basically most of the way back to the Fed’s target of 2.5%.

The CPI has a few major components to it.

One is CPI Goods which is, well, goods of course, but also food, energy, autos, physical things. Goods.

CPI Goods comprise 38% of the weight in the total CPI basket. Goods are volatile, so this component’s up-and-down movement is way more volatile than the total CPI. You’ll hear people trying to be smart, calling this “flexible inflation” which is bullshit for the reasons I’ll explain below.

Those same people in the media are also talking about “sticky inflation” or CPI Services. This is the other 62% of the total CPI basket. This component moves with less volatility…meaning it moves slower.

More bullshit.

Here’s what’s bothering me…

Look at this cover of the late June 2023 issue of The Economist:

“Flexible inflation” isn’t that it’s flexible; it’s LEADING. It is literally leading inflation, meaning it happens first.

“Sticky inflation” isn’t sticky; it’s just slower and less volatile. It’s LAGGING – It happens later.

So back to The Economist cover.

The trouble with “sticky inflation” is that it’s not the right TERM.

You have to think about inflation like this:

It’s about understanding the difference between leading and lagging. 

Lagging and “sticky” are not the same thing.

Here’s an important point and it’s kinda hard to write it out, so hang with my poor prose.

Within the 62% of CPI that represents Services (AKA, Sticky), 34% out of the 62% is shelter and then 25% of THAT 34% is Owner Equivalent Rent (OER)…and OER is based on data that’s around 18 months old.

18 months! That’s not sticky…its lagging and dare I say even extraneous.

Look at it like this. Leading inflation (Goods) peaked in March 2022, about 3 months before overall inflation peaked in June 2022 and lagging inflation (Services) was STILL RISING…and it kept rising until September 2022 when it peaked. That’s 6 months AFTER leading inflation peaked.

Meanwhile, leading inflation KEPT FALLING and hit the Fed’s target in March of 2023…and you know where it is now? UNDER ZERO. Meaning disinflation.

And now lagging inflation has been falling for 5 months. So, the leading data is leading the lagging data because it’s lagging data. Shocker, I know…

So currently we have this:

  • CPI is at 2.97% and off of its high of around 9%
  • CPI Services is at 5% off of its high of around 7%
  • CPI Goods is under zero (-0.9%) off of its high of close to 14%.

Leading is in deflation and lagging is still falling. (And remember, lagging data is about 10 months behind.)

So, when July CPI is announced in the next few weeks, don’t pay attention if people on TV are going on and on about the rate of decent slowing. Pay attention to the direction. In other words, are goods, services, and total all still falling, yes, or no? Watch that.

Basically, if you made it this far you are saying to yourself, “Hey Dave, you could have written a one sentence blog: Goods Lead, Services Lag.” True.

Anyway, people are focused on the bad, but what happens if inflation is nowhere near as bad as people are making it out to be? It could mean rate hikes are over or even cuts come faster to stave off disinflation.

Get your cash bucket fixed-up and stay invested.

Smart Wall Street analysts got the market totally wrong in their prediction back in December of 2022…why listen to any of them now?

Simplify things, understand things, and make good decisions – that will make you a better investor.

Giving people unfiltered opinions and straightforward advice is our value proposition.

Oh yeah, and we also love dogs.

Keep looking forward,


David B. photo

David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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