Millennials Multi Strategy // Focus on CPI

Millennials Multi Strategy // Focus on CPI


BTC is up around 35% to $22,500 in the past weeks. All of this is leaving Digital Technologies Pros asking some important questions:

  1. Has Tech and Blockchain bottomed?
  2. Is it time to be bullish?

Today, we dissect the market interpretation of the domestic consumer price index (CPI) print, examine the logic behind starting year trading, and extract untold warnings from the data they don’t want you to see.

What’s behind the January start?

December CPI data was released by the Bureau of Labor Statistics on Thursday (January 12) and, as par for the course, a volatility-filled trading day ensued.

December’s decline marked the third month in a row CPI has decreased. “Beating back inflation” summarized the Fed’s monetary policy approach throughout 2022 and the Fed continues to pummel it into submission. Crucially, December’s data is seen by many macro-economic pundits as the beginning of a disinflationary, or potentially even deflationary, trend for CPI.

Year-over-year CPI declined from 7.1% to 6.5%, with an unexpected 10 basis point decrease in CPI from November’s measurement. The decline can largely be attributed to the broader energy category, which saw a 4.5% seasonally adjusted decrease from the prior month.

Service sector-based inflation, however, is inherently stickier than flexible-price food and energy goods, and remains elevated, increasing 0.5% mark-to-market from December. Sticky inflation components, as their name suggests, are less volatile than commodity-derived factors of CPI.

Over 2022, beating back sticky inflation was a priority of the Fed. As noted by Chair Powell, core service inflation is one of the most important metrics the Federal Reserve’s Board of Governors examines to predict economic health and steer monetary policy.

Finally, we come to core services other than housing. This spending category covers a wide range of services from health care and education to haircuts and hospitality. This
is the largest of our three categories, constituting more than half of the core PCE index. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the
labor market holds the key to understanding inflation in this category.

Source: Federal Reserve

What the Fed is doing

Why does inflation matter to the Federal Reserve and how do they use monetary policy to combat it? The Federal Reserve is charged with a dual mandate, tasked with maintaining both: Price Stability and Full Employment.

In practice, simultaneously achieving these goals is difficult.

Inflation can be controlled via the tightening of economic conditions and achieved by raising interest rates. As the cost of capital increases and financing becomes more expensive, spending slows, providing downward pressure on inflation.

Contractionary monetary policy is the term used to describe the Fed’s current efforts to slow economic activity by increasing the targeted Federal Funds Rate (the aggregate interest rate charged for interbank secured overnight lending). While the Federal Reserve does not lend directly in the Federal Funds market, it can impact monetary policy with a variety of policy tools , including open market operations, discount window lending, and repo lending facilities.

Markets are forward-looking — they incorporate anticipated future Federal Reserve monetary policy into today’s cost of borrowing. Changes in how the market perceives the future path of inflation become incorporated into yields and asset valuations as the market reconciles these adjustments.

Rising interest rates slow growth and typically lower the level of employment, forcing the Fed to play a balancing game in how quickly and at what magnitude they can increase the Fed Funds rate without driving the economy off a cliff into recession.

Labor markets remained surprisingly resilient throughout 2022, with unemployment down-only, closing out the year at a post-COVID low of 3.5%.


Source: FRED

Strength in employment allows the Federal Reserve to continue to ratchet up interest rates. Asset values are not a primary consideration for the Fed when setting monetary policy. Ironically, over the past year strong employment data has spawned fears that the Fed will have greater room to raise interest rates which has negatively impacted valuations.

With limited relief in sight as the unemployment rate continued to fall, a slowdown in inflation remained investors’ life-line to looser financial conditions.

December’s CPI data finally provided that relief.

What the numbers say 

While the data was not entirely rosy, given the continued inflationary pressures in sticky categories, you better believe Wall Street MBAs did the mental gymnastics to get bullish! As highlighted by the WSJ:


Source: WSJ

Core inflation, the preferred inflationary metric of many policy makers and market participants, already strips out the volatile components of commodities pricing in the measurement. 

Supercore inflation estimates are Wall Street’s attempt to rationalize the increasingly complicated inflation story.

Inflation metrics for many core goods categories have turned deflationary, due to normalizing supply chain and moderating demand for goods (a direct impact of contractionary monetary policy), while inflation in service-based buckets remains high, partially a result of a stubbornly tight jobs market and upwards wage pressures.

Supercore inflation scores exclude both core goods and shelter service baskets, with some market participants opting to precluding medical services, as well.

Roger Hallam, global head of rates at Vanguard, notes that, “the goods and the shelter print will get less relative focus compared to what’s happening on the services side of things,” over the course of the next year. Additionally, Hallam sees market participants placing greater emphasis on employment figures.

Okay, so thinks are looking mixed but promising — what should you do about it though?

 Let’s Stay cautiously bullish and keep searching and working.

Digital Assets technologies are in constant (r)evolution; stay tuned to stay updated.