To The Moon

For the last two years, the stock market has been obsessed with inflation. The market dropped when inflation went up, and the Federal Reserve started raising interest rates. Stocks rose when it was apparent inflation was cooling, and interest rates would eventually come down.

I’m not obsessive about interest rates or the Fed, but it’s worth understanding how this dynamic works from a macro perspective. Interest rates will have an impact on how many cars are sold ( $General Motors(GM)$ ), the pace of loan sales ( $SoFi Technologies Inc.(SOFI)$ ), borrowing rates, and the extra money people have to take vacations ( $Walt Disney(DIS)$ and $MGM Resorts International(MGM)$ ).

I don’t think a basis point here or a basis point there is all that important, but directionally, that’s how interest rates affect the economy and earnings.

The headline number is usually what gets reported in the media, and by that metric, prices were up 2.4% from a year ago, slightly higher than the 2.3% economists expected. But here’s a breakdown of that number.

• Headline CPI: 2.4% year-over-year increase.

• Food: 2.3% increase.

• Energy: 6.8% decrease.

• CPI Less Food and Energy: 3.3% increase.

Here’s a visual look at September’s data.

The big takeaway is that falling energy prices are helping lower inflation. That’s great, but it’s also a bit of a band-aid on the prices we pay for goods overall. And it may not be sustainable.

What I see here is that commodity prices are below headline inflation. Food falls into this category, and the jump in prices during the pandemic and now crash in prices after the pandemic is stark.

Here’s a look at the price of corn:

And wheat:

And soybeans:

Not every commodity follows this trend, but the big food ingredients do. And that’s one of the reasons you’re seeing prices fall at the grocery store.

It also makes me think the core inflation that’s driven by higher property values and labor costs may not go away soon. Those prices are much stickier than a fungible item like oil or corn.

The inflation story may not be behind us after all.

Why isn’t this bad?

We have to look at what’s driving prices for non-commodity goods and services higher. One factor is higher wages (putting more money in people’s pockets), but the more important driver is where goods are being made.

The U.S. is manufacturing more than ever and increasing manufacturing investment faster than at any time this century. Short-term, this investment will make prices higher than buying goods from China and India, but it will also make the economy more durable because the jobs exported over the last 50 years are now being imported.

For the market long-term, it’s better to have a healthier economy built on diverse industries from tech to services to manufacturing than outsource production to low-cost countries. Higher prices are the price we pay, and the market seems to be realizing the tradeoff is worth it.