Stansberry Research

Wednesday Morning Market Comments

C. Scott GarlissStansberry NewsWire

Morning Market Commentary:

  • Gasoline prices tend to be a leading indicator for the U.S. Bureau of Labor Statistics' ("BLS") Consumer Price Index ("CPI").
  • Month-to-date data for November point to the rate of growth slowing compared with the June peak.
  • A slowing rate of price increases should support an easing pace of Federal Reserve rate hikes.

Inflation growth should slow further in November...

Ever since the BLS' CPI began to explode higher in April 2021, energy prices have played a major role. In June 2022, inflation growth rose 9.1%, hitting a near-term peak. However, energy prices – which account for about 9% of the CPI – jumped 41.6% on a year-over-year ("YOY") basis.

The change in energy prices had the largest effect on the overall index. Food prices rose 10.4% while all items less food and energy increased 5.9%. Take a look...

Now, many economists would argue that food and gas prices aren't representative of overall inflation because they're so volatile. But these essentials are what we want to pay the most attention to right now. Changes in food and gas prices are taking the biggest toll on households and businesses. I would argue higher gas prices are worse than a tax increase.

And given the outsized jump in gas prices relative to the move in food costs, that's where we'll notice the largest shift in the inflation trend.

Now, look at the same CPI table from October…

We can see that energy prices are still high, but the magnitude of growth is nowhere close to what we experienced this past summer. In fact, ever since June, gasoline prices have remained in a steady downtrend. And recent data indicates the price at the pump continues to drop.

The change points to easing inflation growth. That will act as a tailwind for the S&P 500 Index.

Gasoline is an easy metric to follow because we can receive prices as recently as yesterday. After all, it's difficult for most rural households to do anything without employing the use of an automobile. So, by keeping track, we can get a sense of what costs look like for average Americans.

According to data from the American Automobile Association ("AAA"), the national average price for a gallon of regular unleaded gasoline in October was $3.76 compared with $3.40 a year ago.

That's an increase of 10.6% on a YOY basis. The nationwide average month-to-date in November has held steady at $3.76. And like October, that compares with the same $3.40 per gallon from a year ago, signaling costs continue to slide.

Now recall, in June, the peak daily price for gas exceeded $5 per gallon. Furthermore, the national average was $4.92 per gallon that month compared with $3.07 per gallon during the same period in 2021. In other words, the month of June experienced 60.3% growth on a YOY basis. In July, the YOY gain was 44%. Those changes drove the CPI higher.

Take a look at the following chart of the CPI compared with gasoline prices. You can see the two metrics move closely together. When gas prices crested in June, the CPI also hit a near-term peak...

So, the price at the pump is a leading indicator of inflation.

Again, gas price data is updated in real-time, while CPI data isn't. And based on the up-to-date numbers from AAA, there has been a sharp and steady pullback in fuel costs. That would indicate easing inflation growth.

The BLS' CPI figures for November are due on December 13. The October numbers showed the pace of growth slowed to 7.7% YOY, the lowest level since January. The current data would lean toward inflation growth cooling when the numbers are released.

Anything below last month's result would signal to the Fed that its rate hikes are successfully dampening inflation. A drop in price growth would also support slowing the pace of interest-rate increases going forward. Considering the central bank announces its final policy adjustment for the year on December 14, all eyes will be on the CPI numbers.

A steady decline in inflation growth and a change in Fed policy direction would act as a long-term tailwind for the S&P 500.