Another month, another crushed dream of peak inflation. And while there is room for a bit of optimism lost in the renewed panic over prices, it is not enough to change the inflation problem that dominates the economy and politics.
Data released Friday by the Department of Labor shows that the consumer price index rose 8.6% in May from a year earlier, a new record high in 40 years as the price of almost everything rose. That’s because Wall Street expected a slowdown, if only slightly, from its 8.3% pace in April. The Biden administration had some investors braced for a new hot report after press secretary Karine Jean-Pierre said during the week that the headline CPI would be raised, while rising energy prices – excluding core inflation numbers – would trickle down to things like airline tickets. . But the report was still bad enough to push stocks down and convince traders that the Federal Reserve has no choice but to raise interest rates by at least 0.5% at each of its next three meetings through September.
The worse-than-expected report should not come as a total shock. This column has written that the calls for peak inflation were premature given what is going on in the energy, food and shelter markets. Keep in mind the Barron’s Base CPI, consisting of year-over-year changes in foods such as meat, eggs, bread, milk and produce, in addition to shelter, gas and utilities. It rose 17% in May from a year earlier and 2.5% from a month earlier. Prices of commodities with relatively inelastic demand, which can be little cooled by monetary policy, are still rising – and the war in Ukraine threatens to push food and energy prices even further.
What is even more surprising is the lack of inflation relief on the commodity side of the economy. The expectation that consumers would shift demand for services from goods, where supply shortages were acute, finally seemed to materialize. Consider the message from
(ticker: TGT). The retailer lowered its profit forecasts for the second time in three weeks earlier this week, warning that profits would fall as it cuts prices to remove unwanted inventory. The company had previously reported a 43% increase in inventory during the last quarter and said more expensive fundamentals mean customers are cutting back on discretionary spending.
Still, the May CPI report showed virtually no relief in commodity prices. Here’s where there’s good news. Consumers are starting to take a break, though it’s clouded by a timing mismatch between what some retailers are reporting and month-old CPI data. As Oxford Economics economist Oren Klachkin puts it, May’s inflation data shows us what’s already happened, while the Target warning shows us what’s to come. The latest wholesale inventory report shows that the stock-to-sale ratio remains well below the prepandemic average, and Peter Boockvar, chief investment officer at Bleakley Advisory Group, says it will take a few months for retailers’ price cuts to factor into the data.
That’s where the good news ends. As Boockvar points out, core goods represent only 20% of the CPI. And while retailers like Target and
(WMT) are over-supplied and are seeing discretionary demand decline, Boockvar notes that:
(JWN) sells more back-to-work and vacation wear. The point: Goods disinflation will generally be moderate and is not a panacea.
The bigger problem with the fraction in some commodity prices is that it just isn’t the right fraction. What will remain most important to many households and businesses are the items that economists and policymakers exclude from their favorite inflation gauges because food and energy prices are volatile. But now inflation in those categories is persistent, taking up a larger share of household spending as inflation-adjusted wages fall. Richard Farr, chief market strategist at Merion Capital Group, notes that when you adjust the average hourly wage data reported in last week’s jobs report with the latest CPI data, you find that real average hourly wages in May are the eighth month in a row and by 3% year-on-year.
Omair Sharif, president of Inflation Insights, notes that gasoline prices are still not at their peak when you factor in inflation. Still, he says, the shock of the past four months has been enormous. He says the jump in the share of gas spending since early 2022 is the largest four-month increase since the data began in 1959, and his math suggests households’ share of gasoline spending jumped to 3.2 in June. % will rise – highest in June. eight years and above the long-term average.
The actual impact of energy prices is much greater than the direct share of household expenditure on gas would suggest. Energy is the most important thing for consumers, Farr says. “If your base inflation scenario is that you just got a discount on a cheap T-shirt at Target, you might want to look a little deeper, because oil is going everywhere,” he says. “Every item needs petroleum to be shipped.” This is especially true for food. In the US, transportation and packaging account for the largest share of total food costs.
Even as commodity disinflation begins to pick up, Farr says there’s another reason to expect higher headline inflation. The backlog in rent that corresponds to owner — the government’s way of making housing a service for calculating CPI — relative to house prices means inflation can be underestimated for up to two years, he says, pointing to research by the Federal Reserve Bank of Dallas predicts rental inflation to rise 6.9% year-on-year by December 2023. In May, the rent of accommodation rose by 5.5% compared to a month earlier.
Recent data from John Burns Real Estate Consulting shows that cash buyers account for a larger share of home purchases as mortgage rates rise. CEO John Burns says that segment jumped to 22% in April, up from 18% at the start of the year. That data point shows how difficult it will be to cool house prices in this tightening cycle, another reason why overall inflation will remain stubbornly high. Merion’s Farr, for his part, says the Dallas Fed’s estimate of rental inflation is likely too low.
The bottom line is that there will be some inflation relief, and any pause will be welcome. But where emergency aid is most needed will remain elusive as policymakers and politicians are unable to do much in the short term to alleviate the pain consumers feel and change the inflation narrative.
write to Lisa Beilfuss at firstname.lastname@example.org
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