Consumer price index: The government’s narrative on inflation lacks support for its currency.

The Biden Administration’s narrative on the consumer price index lacked any support for or preferred direction of the US currency with today’s release of the consumer price index.

According to data collected by the U.S. Bureau of Labor Statistics, the CPI increased 0.6% in August 2023. What does this mean?

Let us say that at the beginning of August your total household expenses were expected to be $1,000 for that month. Given the increase during the month of August in goods and services, your expected monthly household expenditure for September would be $1,006.

The problem for the consumer is that his wages are not keeping up with the increases in prices. According to the BLS, real average hourly wages between July 2023 and August 2023 decreased 0.5%.

Assuming that the consumer works 160 hours per month, with household expenditures at $1,000, his hourly income would have to be $6.25. At the new household expenditure of $1,006, his hourly income would have to climb to $6.28.

Given the real hourly wage decrease of 0.5%, the consumer’s hourly income has fallen to $6.22. The consumer would have to work an additional 1.7 hours per month to meet his new household expense threshold.

At first blush as it pertains to whether an attractive environment is being created for potential traders of the US currency, I have to say a nurturing environment is not being created. Price increases may translate to revenue increases depending on how well the producer controls her input costs. If so, then increased profits make American stocks more attractive and to take advantage of appreciation in stocks and other securities investors and traders will have to buy US currency.

While productivity increased 3.5% in the second quarter of 2023 and output increased 1.9%, according to BLS data, hours worked declined 1.5%. If consumers need more hours to make ends meet but are seeing hours cut, does this employer behavior support the currency?

Combine this data with the decrease in hourly earnings and I see a fall in consumer spending and eligibility for consumer credit. Based on this data, as a trader, I have an increasing expectation of downward pressure on the dollar.

The narrative messaging this morning by the Biden Administration seems to gloss over this potential problem of a declining currency value. Mr Biden used the opportunity to pit clean energy advocates on the left against tax and social program budget cut supporters on the right.

Noting the BLS finding that gasoline costs contributed to 50% of the increase in household expenditures, Mr Biden argued in his White House statement that while inflation has fallen substantially, fuel costs have dinged the family budget and investment in clean energy versus tax cuts for the rich is the policy way forward.

As I prepare to make a bet on where currency prices will move over the next week, I am taking these narratives into consideration. With the Federal Reserve being mum until next Wednesday, I will pay close attention to what the data has been saying.

Alton Drew

13 September 2023

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