Soaring prices in restaurants indicate that inflation is well above the "official" data suggested?


For bulls in the stock market, Friday's CPI data It could not have been more a gift if the report was packed with a bow. In perfect harmony with market expectations, core inflation has been reduced to 1.9%, the worst value since August 2017. More importantly, price pressures have reduced one of the key inflation indicators. Inflation most monitored under the Fed's 2% Maginot Fed's "data-dependent" line has more reason to postpone growth rates until the second half of the year.


But as often with US data – especially the measures of inflation that chronically underrepresent the real level of inflation in the economy, as we have explained in the past – The devil is in the details. And the impression of Friday was no exception.

To witness it: While overall inflation has declined, the full-service restaurant and snack sub-index – which represents the cost of catering in full-service restaurants – has climbed 0.5%, its largest monthly increase since 2011.

So why the reason for the discrepancy?


Especially considering that the cost of food – which, according to what we understand, is the main product sold in restaurants – remains below its levels from the beginning of 2018.


It is tempting to attribute this to an acceleration in wage growth or an increase in the minimum wage, but the increase occurred in December; a wave of minimum wage increases across the US is not expected to come into effect until next month. And while job data recently reflected an increase in average wages, restaurant workers rely heavily on tips.

Bloomberg hinted at the incongruity, describing the rise in prices for full-service restaurants as "another headwind for Americans". In fact, given the numerous warning signs regarding consumption in the second half of 2018, including trade-related headwinds and the devastating effect on the "wealth effect" on equities, It's almost as if something about this figure does not add up. .

Rising food costs is another hurdle for Americans. While low gas prices and high consumer confidence suggest a strong environment, year-end market volatility, disappointing holiday sales, trade barriers and the partial closure of the US government are beginning to put some buyers on alert. If questions about global growth persist, restaurant sales could be subject to an economic downturn as consumers choose to save money by eating at home.

… that is to say, unless it's really an Ariane thread suggesting that the actual inflation rate of the US economy is actually much higher than official data suggest. Of course, if this were true, investors and real-world players could be seriously affected – not only because the Fed would be in a hurry to accelerate rate hikes, but it would likely provoke a damaging reversal. treasury yields that could trigger a resumption of the rout of the market "Shocktober".

In light of this, we would like to re-emphasize a report published in 2017 by the Devonshire Research Group which analyzed what its writers have described as a chronic underreporting of US inflation data. Devonshire had then suggested that the real rate of inflation could be up to three times the official rate. They listed a number of reasons why this might be true, starting from the idea that outdated inflation gauges such as the CPI were no longer a "financial tool" usable by investors, but had become a "political tool" used by central governments. bankers to justify their hyper-accommodative monetary policy.

Here is a summary of Devonshire's summary conclusions:

  • The calculation of the US official CPI is governed or even distorted by many complex technical decisions

  • The declaration of inflation is less a measure of purchasing power (and therefore a financial tool), and more and more a process affecting macroeconomic policies (and therefore a political leverage)

  • Real gross domestic product (GDP) measures, Treasury yield curves and inflation-protected securities (for example, TIPS), government and union wages / all rely on inflation indices official Americans who are subject to these distortions.

  • Most financial wealth management models are based on an assumption of price stability and a default 3% inflation threshold – what would happen to these models if the real value was closer to 7-11%?

  • If we recalculate a CPI based on purchasing power, denounce counter-current relationships and remain disinterested in modern economic policies, we get a rate of 7.0% to CPI practice over the course of the year. of the last decade.

  • This has profound implications for the standard of living in relation to the real standard of living, and could explain the rapid increase in US consumer debt, the potential reduction in perceived quality of life compared to that reported, not to mention the unexpected political tendencies

  • An inflation of 7 to 9% after 1990, and not 3%, would also suggest conditions close to the "bubble" existing in many sectors of consumption

* * *

For anyone who doubts the importance of the CPI as a policy tool, consider the following comments held on Thursday (one day before the last printing of the CPI). IPC) by Fed Vice President Richard Clarida, who hinted that the recent "slowdown" in inflation had eased pressure on the Fed to raise interest rates (according to the median projections of the last "plot" of the central bank, Fed decision makers have expected in December that the central bank would increase its rates only twice next year, against three previously, then long-term terminal rate fell from 3% to 2.8%).

In a speech on Thursday, Clarida said that "inflation has recently surprised inflation and it is not yet clear that inflation has returned" to the central bank's objective on a sustainable basis.

Despite the various sub-indexes published to give investors a more complete breakdown of price pressures by the economy, the methods used to summarize all of this into one overall figure – what everyone is looking at – remain surprisingly opaque.

Which means that the data is much more prone to manipulation than many could understand.