Bob’s Journal for 2/2/23

Take a Deep Dive Into the Latest Inflation Data

It’s time for a close look at the latest Consumer Price Index (CPI) report.

I last did this in the July 21, 2022, entry for Bob’s Journal under the headline “Inflation Is Deeper and Broader Than Many Believe.” I stated that “inflation is well-embedded in the economy and will take some time and effort to reduce.”

At the time, investors were optimistic that inflation quickly would fall to the Federal Reserve’s target of 2%. The optimism triggered a bear market rally in stocks.

The latest CPI report elicited a similar response, as did the Personal Consumption Expenditure (PCE) Price Index report (discussed in The Data section below).

The CPI report showed the 12-month inflation rate continues to decline from the highs reached last summer. Price increases are slowing especially fast for many commodities and goods. The 12-month increase is down to 6.0% for the CPI and 5.7% for the core CPI (which excludes food and energy).

Despite the good news and positive trend, I believe investors and the markets are too optimistic.

While below the highs of 2022, most (though not all) of the monthly CPI increases since mid-2022 have been above market expectations and higher than the Fed’s target. Also, the recent rates still are very high by historic standards and would have been unthinkably high even a year ago.

In addition, while almost all goods and services were increasing in price as the CPI marched towards its peak in 2022, the reverse isn’t the case since inflation’s high point.

The CPI’s 12-month rate of increase has been pulled down primarily by lower price increases, and even price declines, in goods and commodities.

Those prices tend to be volatile and change quickly in response to various forces. Prices of goods and commodities are down partly because some supply chain issues have been resolved and partly because of slower global growth.

But those prices make up a relatively small portion of the CPI. The services sector is about 30% of the CPI and housing is another 30% or so. Food and energy are about 20%, and goods are about the same.

Housing inflation generally is measured by rent increases, known as owners’ equivalent rent. That has been very strong for a few years. While its rate of increase probably will slow as the housing market slows, its likely to remain fairly strong for a while.

Services are even more important. Services depend largely on labor, and the labor market remains tight. Businesses have been increasing wages faster than before the pandemic, and that remains a major support of inflation. As long as people are able and willing to pay for services, inflation is likely to continue.

The easy part of bringing down inflation is behind us. Many supply chain problems have been resolved. People have learned to do without or substitute for some goods and commodities. As we expected, the CPI peaked last summer.

But the CPI still is a long way from the Fed’s target. As long as the labor market is strong, inflation is likely to settle in between 3% and 5%. Then, the Fed must decide if that rate is acceptable or if it is more important to slow economic growth enough to bring the rate down to the 2% target.

Reporting Surprises in Medicare Advantage Plans

One of the most important decisions for those 65 or older is the choice of Medicare coverage.

The first big decision is whether to enroll in original Medicare or sign up for a Medicare Advantage plan. It is expected that this year, for the first time, half or more of Medicare beneficiaries will be enrolled in Advantage plans instead of original Medicare.

There are pluses and minuses to each choice, and I’ve covered them in detail in past issues of Retirement Watch, episodes of the Spotlight Series, and my books.

But it is important to think about the long-term consequences, and many beneficiaries don’t do that.

For example, consider nursing home coverage.

Neither Medicare option covers long-term stays in a nursing home that are needed primarily for custodial care. But Medicare does cover up to 100 days of in a nursing home or skilled nursing facility that’s needed after being in a hospital for at least three days.

This type of care typically is for rehabilitation or recovery after a major surgery or illness. The individual isn’t ready to go home yet but doesn’t need to stay in a hospital.

When you’re in original Medicare, you, your doctor and perhaps other medical providers decide how long you should stay in the nursing facility before going home.

But in an Advantage plan, the plan decides how much rehabilitation is going to be paid. This report from the Kaiser Family Foundation indicates that Advantage plans deny or limit stays in nursing homes. Government data show that nursing home stays are among the services most frequently denied by Advantage plans.

Though the nursing home stays meet the coverage rules for Medicare Part B, the Advantage plans rule them “medically unnecessary” and deny coverage.

Another long-term issue is your ability to change from an Advantage plan to original Medicare.

The rules allow you to change plans each year during open enrollment. You can switch from an Advantage plan to original Medicare.

But as a practical matter, you might not be able to obtain the coverage you want and need if you switch.

Original Medicare has a number of coverage gaps. The most significant gap, other than prescription drugs, is the 20% coinsurance amount on most types of care covered by Part B. You’re on the hook for the 20%, with no dollar limit.

That’s why members of original Medicare should obtain a Medicare supplement (also known as Medigap) policy that covers most of the gaps in original Medicare. They also should have a Part D prescription drug policy.

In your initial Medicare enrollment period, insurers are required to sell you the Medigap policy of your choice, regardless of your health history.

But once the initial enrollment period ends, insurers aren’t required to issue you a Medigap policy. The insurers can undertake medical underwriting in which they review your medical history. They can require a medical exam. Based on the results, an insurer can decline to issue you a policy or charge you a higher premium.

States are allowed to provide additional consumer protections for purchasers of Medigap policies. Currently four states (Connecticut, Massachusetts, Maine, and New York) extent the guaranteed-issue requirement to all Medigap applicants, including those outside their initial enrollment period.

A number of people initially sign up for Advantage plans because they expect to have lower out-of-pocket costs and want the additional benefits, such as vision and dental care.

But some beneficiaries want to switch to original Medicare when they develop health problems, because they want the freedom to select their medical providers and don’t want to seek permission to see specialists or have tests and treatment.

Though the law allows a switch from an Advantage plan to original Medicare during the open enrollment period, as a practical matter it might not be available. The beneficiary might not be able to obtain a Medicare supplement plan to cover the gaps in Medicare.

You can switch from an Advantage plan to original Medicare in any open enrollment period. But you might not be able to obtain a Medigap policy. You’d be responsible for all coverage that’s in Medicare Part B’s gaps. That might make the switch unaffordable and compel you to stay in an Advantage plan.

The Connection Between Early Retirement and the Housing Boom

The Federal Reserve’s easy money policies during the pandemic appear to be a major reason for the early retirement wave that some call the Great Resignation.

We know that many people left the work force during the early years of the pandemic. This led to a shortage of workers and a historic number of unfilled job openings.

Since the peak of the pandemic passed, labor force participation has increased. But the work force still is below pre-pandemic expectations, and there are many unfilled job openings.

Recent research shows that almost the full gap in the labor force is due to earlier-than-expected retirements of Americans ages 55 and older.

A couple of researchers attempted to explain why older Americans left the work force early during the pandemic.

Most explanations have concluded the early retirement wave was caused by a combination of rising prices of investments and homes, as well as fear of contracting the virus in the workplace.

These researchers concluded “the great resignation among older workers can be fully explained by increases in housing wealth.”

The number-crunching by the researchers concluded that if home price increases in 2021 had been the same as in 2019, there would have been no decline in labor force participation by older Americans.

The Data

The Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred measure of inflation, increased 0.1% in December, the same percentage as in November. Over 12 months, the PCE Price Index is up 5.0% as of December, compared to 5.5% in November.

The core PCE Price Index, which excludes food and energy, increased by 0.3% in December, up from 0.2% in November. Over 12 months, the core index is up 4.4%. It increased 4.7% as of November.

Personal income increased 0.2% in December, down from 0.3% in November. The December monthly increase was the lowest since April.

Personal spending declined 0.2% in December, following a 0.1% decline in November. When adjusted for inflation, spending declined 0.3% in December.

The Consumer Sentiment Index from the University of Michigan improved to 64.9 in January, compared to 59.7 at the end of December and 64.6 at mid-month. January’s level is the highest since April 2022.

Consumer Sentiment about both current conditions and expectations improved. Consumers expected lower inflation over the next year and about the same level of inflation over the next five years as they did in December.

Home prices declined 0.8% in November, the same as in October, according to the S&P Corelogic Case-Shiller Home Price Index. Prices increased 6.8% over 12 months. That’s down from 8.7% in October and the lowest 12-month increase since September 2020.

The FHFA House Price Index was not as weak. It declined 0.1% in November, following no change in October. Over 12 months, the FHFA index increased 8.2% as of November after increasing 9.8% through October.

Existing home sales declined by 1.5% in December. Over 12 months, sales declined 17.8%. Sales for 2022 were at their lowest level since 2014.

Pending home sales increased 2.5% in December after declining 2.6% in November. Over 12 months, pending home sales declined 33.8%.

Housing starts dipped by 1.4% in December, the fourth consecutive month of declines. Over 12 months, starts are down 3.0%.

New home sales increased 2.3% in December and were at the highest level in four months.

For all of 2022, new home sales were 16.4% lower than in 2021 and were the lowest yearly amount in four years.

The median price of a new home in December was $442,100, and the average sale price was $528,400.

Compensation increases continue to remain elevated, but the rate of increase is declining, according to the Employment Cost Index.

The index increased 1% in the fourth quarter of 2022. That’s the third straight quarter the increase was less than in the previous quarter.

Over 12 months, compensation increased 5.1% in 2022. That’s slightly higher than the 5.0% rate, as of the end of the third quarter. After inflation, compensation declined 1.3% in 2022.

Durable goods orders increased 5.6% in December, and after excluding defense, orders rose 6.3%.

But after excluding both defense and the volatile transportation sector, which is considered a good measure of business investment, orders declined 0.2%.

The Kansas City Fed Manufacturing Index improved to negative 4 in January from negative 6 in December. January was the best level for the index four months.

The Philadelphia Fed Manufacturing Index still is negative but improved to negative 8.9 in January from negative 13.7 in December. That’s the fifth consecutive negative reading and the seventh in the past eight months.

The Dallas Fed Manufacturing Index shared a similar story. The general business activity index was negative 8.4 in January, but that’s an improvement from December’s negative 20. January is the ninth consecutive month of negative readings for this index.

The ISM Manufacturing Index was 47.4 in January, down from 48.4 in December. January is the fifth consecutive month the index was lower than the previous month and the lowest level since May 2020.

It also is the third straight month the index was below 50.0, indicating the sector is contracting.

The PMI Manufacturing Index improved slightly in January to 46.9 from 46.2 at the end of December. January is the third consecutive month the index was below 50.0, indicating the sector is contracting.

The number of job openings in December increased to more than 11 million, or 6.7% more than in N0vember, according to the JOLTS (Job Openings and Labor Turnover Survey) report. Economists were expecting another decline to around 10.2 million job openings.

There were only small changes in the number of hires, separations and quits. The quit rate was down to 2.7% in December. That’s below the record high 3.0% recorded at the end of 2021.

Gross domestic product (GDP) increased at a 2.9% annualized rate in the fourth quarter of 2022, according to the first estimate. That follows a 3.2% annualized increase in the third quarter. For the year, GDP jumped 2.1%.

Spending on both goods and services increased. But both residential investment and fixed investment declined significantly.

There were 106,000 new private sector jobs created in January, according to the ADP Employment report. The December report was upwardly revised to estimate 253,000 new jobs were created.

The January level is the lowest since January 2021 and well below forecasts. ADP indicated extreme weather in mid-January, when it compiled data for the report, likely caused the sharp decline.

New unemployment claims declined another 6,000 to 186,000 in the latest week. That’s the lowest level since April 2022.

Continuing claims, which lag a week behind new claims, increased to 1.675 million from 1.655 million.

The Markets

The S&P 500 rose 1.57% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.11%. The Russell 2000 increased 2.43%. The All-Country World Index (excluding U.S. stocks) fell 0.12%. Emerging market equities declined 1.66%.

Long-term treasuries lost 0.05% for the week. Investment-grade bonds increased 0.05%. Treasury Inflation-Protected Securities (TIPS) fell 0.48%. High-yield bonds gained 0.16%.

In the currency arena, the U.S. dollar gained 0.22%.

Energy-based commodities lost 0.75%. Broader-based commodities were unchanged. Gold declined 0.44%.

Bob’s News & Updates

My new book is officially published: “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here or here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com, said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.