Inflation Accelerated in June as Economic Recovery Continued U.S. consumer prices rose 5.4% in June from a year earlier, keeping inflation at the highest annual rate in 13 years.
(…) The so-called core price index, which excludes the often volatile categories of food and energy, rose 4.5% from a year before. (…) Prices for used cars and trucks leapt 10.5% from the previous month, driving one-third of the rise in the overall index, the department said, marking the third straight month of big price increases amid a supply shortage of vehicles. The indexes for airline fares and apparel also rose sharply in June. (…)
Compared with two years ago, overall prices rose 3% in June. Overall prices jumped at a 9.7% annualized rate in the three months ended in June, on a seasonally adjusted basis, faster than the 8.4% pace in May.
Much of the increase in June was driven by factors that are likely to subside in coming months, including the semiconductor chip shortage that is reducing the supply of autos and the post-reopening surge in consumer demand. Accelerating prices for new and used cars and gains in prices for lodging and transportation services, which includes car and truck rentals, contributed the vast majority of the core CPI increase.
But prices of goods and services less directly influenced by these trends are picking up too. For example, rents are now rising at a pace slightly faster than before the pandemic. Stripping out those more temporary contributions, the core index nonetheless rose at a pace that would normally be considered relatively healthy though not enough to signal a worrisome pickup in inflation, said Alex Lin, U.S. economist at BofA Global Research.
More companies are passing on higher labor and materials costs to consumers. Many also are raising prices for the first time in years, as demand surges following pandemic-related business restrictions. (…)
The facts:
- Core CPI has increased 0.85% MoM on average in the past 3 months. For all of Q2, it is up 2.0% QoQ. No base effect here.
- Both total CPI and core CPI are now well above pre-pandemic trends:
- Core Goods prices jumped another 2.2% MoM in June following +1.8% in May and +2.0% in April. They are up 8.7% YoY. Used cars and trucks prices again boosted the number but even excluding this item, Core Goods prices were up 0.44%, 0.66% and 0.56% MoM in April, May and June respectively, +6.7% annualized in the last 3 months. No base effect there.
Data: Cox Automotive; Chart: Axios Visuals
- Shelter costs, nearly 33% of CPI, rose 0.5% in June and are up 4.9% annualized in Q2. This sticky component is just starting to adjust to the jump in house prices. It will likely dominate inflation trends in the next year given the usual lags. Nationwide, rent prices are up 7.5% so far this year, three times higher than normal, according to data from Apartments.com.
- The FOMC has recently been giving more importance to the trimmed-mean inflation rate which weeds out the top and bottom 16% of monthly price movers. This measure, stuck at the 2% annualized range since 2017, jumped to 5.0% QoQ annualized in Q2.
- The Atlanta Fed’s Flexible Core CPI, a weighted basket of items that change price relatively frequently, exploded in Q2. Its Sticky Core CPI, a weighted basket of items that change price relatively slowly, is up 4.3% annualized in the last 3 months, down from 4.6% in May but still its highest level since 1995. It has been trending up in the last 10 years, getting above 2.5% just before the pandemic.
- BTW, the BLS now publishes an index that excludes food, shelter, energy and used cars and trucks. Bloomberg’s John Authers has the chart:
- Transitory or not, everybody has to be surprised by the recent inflation numbers. The 0.9% MoM jump in the June CPI was well ahead of the consensus prediction of 0.5% while the core also rose 0.9% MoM versus the 0.4% consensus. It may prove “transitory”, but at a much higher level than previously thought. As ING points out,
There were 0.3% or 0.4% MoM component readings throughout, suggesting broad inflation pressures (…). Meanwhile, food rose 0.8% MoM, apparel was up 0.7%, housing rose 0.4%, gasoline rose 2.5% MoM with medical care the only component to post a decline (-0.1% MoM). This means that the annual rate of headline inflation is now running at 5.4% – just below the 2008 oil price spike induced peak of 5.6%. However the annual rate of core inflation is now 4.5%, which it was last at in November 1991! (…)
[With yesterday’s] National Federation of Independent Business survey with a net 47% of respondents currently raising their prices – the highest balance since January 1981 – with a net 44% of firms looking to raise prices further over the next three months. This casts even more doubt on the Fed’s position that we should soon expect a significant decline in price pressures.
The upside inflation risks will be compounded by housing costs since primary rents and owners’ equivalent rent account for a third of the CPI basket. Movements in these components tend to lag 12-18 months below house price changes, as the chart below shows. We suspect that the housing components of inflation will be the story to watch through the second half of this year.
House prices and the relationship with housing CPI costs
Source: Macrobond, ING
- Record Natural Gas Prices Give Power Markets a Jolt A scramble for natural gas is creating pockets of scarcity in the global market, boosting prices for the fuel and for the electricity generated by burning it.
Rampant demand in China is sucking in chilled cargoes of gas from the U.S., after a year in which American energy companies throttled back production. A drought in Brazil has added to the competition by curtailing power output from hydroelectric dams.
Searing heat in Canada and the Pacific Northwest has also lifted gas demand. Some places are missing out, like Pakistan, where a shortage of gas and the delayed onset of the summer monsoon have prompted power outages.
Europe, in particular, is feeling the pinch. With vessels of liquefied natural gas heading to Asia, buyers on the continent have struggled to replenish tanks and caverns after a long and cold winter. Storage levels are the lowest for this time of year in a decade, said Natasha Fielding, a gas analyst at Argus Media.
The price of gas at a trading hub in the Netherlands shot to a record $13.10 per million British thermal units in July, according to S&P Global Platts data going back to 2004. Barring mild temperatures this winter, gas prices are likely to remain elevated globally for at least another year, according to Chris Midgley, head of analytics at the commodities-data firm.
“There just isn’t enough [liquefied natural gas] to supply Europe,” Mr. Midgley said. “The LNG, of course predominantly coming out of the U.S., is being pulled into Asia and also into Latin America.”
High prices for gas, coal and emission permits—the main input costs for power plants—have fed off each other to send electricity markets skyward too. In Germany, Europe’s largest economy, power prices in July jumped to about €83.67, equivalent to around $99.26, a megawatt-hour, according to Argus. That is close to their highest level in figures dating back to 2000. U.K., Spanish and Italian power prices have shot to record highs. (…)
U.S. crude prices have risen 54% this year to about $75 a barrel and Americans drivers are paying more for gasoline than they have done in almost seven years. Thermal coal hasn’t been as expensive in a decade.
For consumers and businesses, it is a painful reminder that energy bills can go up as well as down. The jump is driving a quicker pace of inflation, though central banks say that effect will wash out. (…)
Profits are being squeezed in industries such as chemicals (…). Pharmaceutical and automotive companies that can’t readily raise prices for customers are among the most vulnerable (…).
- The NY Fed Underlying Inflation Gauge (UIG)
John Authers:
Another alternative is the New York Fed’s measure of “underlying inflation,” which is fiendishly complicated but involves disaggregating the bureau’s data, looking at plenty of other measures, and seeking out the underlying trend. The latest number for June hasn’t been published yet [it was published late yesterday]; as of May this measure showed a sharp rise to 3% [June is 3.5%], and it’s a fair bet that it will now be right at the top of its range.
But it’s interesting that this measure, first of all, provides a smoother pattern (without a spike in 2008), that it shows inflationary pressure rising a bit ahead of the pandemic, and that it is influential over monetary policy. A significant rise in underlying inflation, so measured, has tended in the past to lead the Fed to tighten. Doubtless many in the markets expect the same again:
Transitory or not, higher overall inflation rates, particularly on basic essentials such as food and energy, are starting to bite hard on discretionary labor income. Total CPI is now rising 2% faster than wages. The June CPI Food-at-Home index is 5.4% above its February 2020 level and the CPI-Energy index is 8.9% above. Nobody wants stagflation now!
According to the Chase spending tracker, consumer expenditures are now back to pre-Covid trends, up 14.3% from two years ago…
…even though growth in expenditures on goods is flattening with June Control Sales seen down 0.8% MoM. Control Sales have edged lower since March but remain 18% above their pre-pandemic level.
During yesterday’s JPM conference call, Jamie Dimon said of the American consumers: “The pump is primed. Their house value is up, their stock value is up, their incomes are up, their savings are up, their confidence is up.”
As the economy reopens, a rising share of expenditures will go to Services. So far, this has not hurt spending on Goods much but sharply higher prices on basic goods and services would quickly impact discretionary spending. BTW, the CPI-Food-Away-From-Home index is up 5.5% from its February 2020 level and +7.8% a.r. in the last 2 months.
Such a scenario would greatly support Michael Wilson’s scenario:
Michael Wilson, Morgan Stanley’s chief equity strategist, made a case in his last Monday Weekly Warmup for a series of rolling corrections ultimately ending by a 20% “de-rating” of equities.
Over the past several months we have taken a less optimistic view of the markets than most based on our “mid cycle transition” narrative. During such periods, it’s common for the market to rotate away from early cycle winners toward larger cap, higher quality stocks. This rotation away from early cycle leadership and small caps is now well established and underway (Exhibit 1). There is also a de-rating process for the broader market of approximately 20% that usually occurs (Exhibit 2).
The S&P 500 Index is up 16.7% YtD but it has been challenging to even match that for most investors: only 5 of 11 sectors did better including Energy (+39.4%) and Financials (+25.6%) leading the way. These 2 sectors peaked in early June and have since lost 10.1% and 8.0% respectively. In fact, eight sectors have suffered meaningful setbacks this year, ranging from -6.8% (Industrials and Cons. Staples) to 14.9% for Energy and -13.7% for Cons. Discretionary earlier in the year.
Investors clearly have no conviction and scramble to adapt to changing circumstances and moods.
Compare these four charts to get a sense of how narrow and inherently volatile this market has become:
Even the NYFANG index has turned into a heart pounding roller coaster after almost doubling since its March 2020 low.
Canadian Retail Foot Traffic Jumps in Sign of Pent-Up Demand
Canadians are eager for in-store shopping as virus restrictions ease, according to geolocation data compiled by SafeGraph Inc.
The San-Francisco based analytics firm released complete Canadian data for the first time this week, showing foot traffic at clothing stores is up 44% in June from the same month in 2019, according to a Bloomberg analysis of the numbers. In May, the two-year gain was 19%. (…)
Cathie Wood Sells China Tech Stocks, Warning of Valuation Reset
(Factset vis The Market Ear)
How Biden’s Executive Order Could Reshape Rail and Ocean Shipping The Biden administration says the relatively small number of major players in the ocean-shipping trade and the U.S. freight-rail business has enabled companies to charge unreasonable fees. New rules target what the White House says is a pattern of consolidation
President Biden’s sweeping executive order signed last week laid out the administration’s priorities for promoting competitive markets and limiting corporate dominance. Among the dozens of provisions included in the order are directives aimed at railroads and ocean shipping.
The administration says the relatively small number of major players in the ocean-shipping trade and the U.S. freight-rail business has enabled companies to charge unreasonable fees. In the case of the seven Class 1 freight railroads, consolidation has given some railroad companies control of most of the freight tracks in parts of the country.
The executive order encourages the Surface Transportation Board to take up a longstanding proposed rule mandating so-called reciprocal or competitive switching, the practice whereby shippers served by a single railroad can request bids from a nearby competing railroad if service is available. The competitor railroad would pay access fees to the monopoly railroad, but could win the shipper’s business by offering a lower price, using the rival railroad’s tracks and property. The railroad trade association, the Association of American Railroads, has opposed the policy. (…)
The executive order asks the maritime commission to take steps to protect American exporters from high fees. The order also asks the commission to work with the Justice Department to enforce its actions.
