Mind The Sticky CPI

The essence of the December CPI report is embodied in the split-screen chart below. The BLS’ so-called “sticky price” index (purple line), which accounts for 70% of the weight, continued to accelerate, rising at a +6.5% Y/Y rate. That’s the largest gain since July 1982.

By contrast, the “flexible price” index (black line) declined at a -2.3% annualized rate, thereby reflecting a dramatic reversal from the +25.1% annualized gain (three month basis) posted last March. The latter also explains why the headline CPI has been inching lower since the 9.0% Y/Y peak in June.

The larger point, however, is actually hiding in plain sight in the chart below. That is, the surge and then sharp reversal in commodity and other goods prices has contributed to a false read of the headline CPI trend on a Y/Y basis. It first generated an excessive rate of acceleration in the headline CPI and is now causing a overshoot of deceleration.

Stated differently, the CPI got yo-yo’d owing to Washington’s unerring instinct for bad policies. In this instance the Virus Patrol lockdowns roiled global supply chains, driving manufactured goods prices skyward, followed by the malefic Sanctions War on Russia, which sent energy and other commodity prices soaring.