PEAKFLATION?
Inflation Will Collapse in Next Year: David Rosenberg
Rosie told Bloomberg that inflation fears in the market and at the FOMC are totally unfounded given, as he detailed in his daily newsletter:
Bottlenecks from the pandemic have eased. Freight costs are on the decline, no matter the measure. Commodities have sagged sharply. The trade-weighted U.S. dollar has jumped 12% in the past year — this has only happened six other times in the past fifty years! The money supply is either contracting or stagnating and fiscal policy is in major restraint mode. We have a huge inventory overhang outside the auto sector — the ex-auto retail sector inventory-to-sales ratio has spiked to a two-year high of 1.16x compared with 1.05x twelve months ago. The I/S ratio in the wholesale sector has expanded to 1.67x from 1.48x a year back. This time last year, there were just 6 months’ worth of unsold new home inventory — that figure has ballooned to 10.9 months’. The unsold backlog in the resale market has gone from 2.6 months’ supply to 3.3 months’, the highest in over two years. We have shifted from a world of shortages to abundance — even in the semiconductor space — and the Fed is responding to the shame of missing a sixteen-month inflation run-up that is now in the rear-view mirror. Not to mention every Tom, Dick, and Harry pundit in the media is still talking about how much more Powell has to do and how far he is behind the curve. Talk about chasing yesterday’s story.
Also yesterday, the Atlanta Fed’s Raphael Bostic published what I can use as a reply to David who, acknowledging the build up in services inflation, dismisses the threat on the basis that services prices are lagging indicators:
(…) Still, even as certain inflationary pressures appear to be ebbing, we know we have a fight ahead. Food and rent prices, categories that hit lower-income consumers especially hard, continued their climb in July. And while goods prices show signs of moderating, core services inflation continues to drift upward, and inflation in services prices tends to be more persistent than goods inflation. (See the Atlanta Fed’s Sticky-Price CPI.) Finally, while the July consumer price index report represented a reprieve in the pace of price increases, it also makes clear that price pressures remain stubbornly widespread and not confined to a few items.
Since August 2021, more than two-thirds of the “market basket” of products and services that federal statisticians use to calculate inflation has posted monthly price increases of greater than 3 percent at an annual rate, while more than half of the market basket has been rising at rates above 5 percent since last September. Keep in mind, we aim for 2 percent inflation. Put simply, those numbers constitute a clear signal to monetary policymakers that price pressures remain elevated and broad-based. (…)
The factual evidence shows that CPI-services is less volatile than headline CPI and, in effect, generally lags the more economy-sensitive CPI-goods. But, because services inflation is significantly influenced by wage trends, its lag has much more to do with the labor market cycles: services inflation tends to slow only after employment growth (black line) becomes negative.
In July, the Atlanta Fed Wage Tracker showed that wages overall were rising 5.5% but that most services wages were rising at a faster rate:
- Leisure and Hospitality: +6.3% YoY
- Trade & Transportation: +6.2%
- Finance & Bus. Services: +5.6%
Wages in two large sectors, Education & Health and Public Admin. are still rising more slowly, 5.0% and 4.8% respectively, but they are both in a rapid catch up mode from 3.8% and 3.3% respectively last January.
Yesterday, we also learned that the 115,000 railroad employees reached a deal providing “a 24% wage increase through 2024, with a 14.1% increase effective immediately”.
And this:
Workers of U.S. small businesses continue to benefit from higher wages, according to the latest Paychex | IHS Markit Small Business Employment Watch.
Average hourly earnings growth increased to 5.18 percent, matching a record set in May 2022. Meanwhile, the pace of job growth at small businesses moderated from the previous month, slowing -0.20 percent. The Small Business Jobs Index stands at 99.94. (…)
In further detail, the August report showed:
- At $30.71 per hour, hourly earnings increased by $1.51 in the last 12 months.
- At 6.45 percent, Florida ranked first among states for hourly earnings growth. Six of the 20 states analyzed had hourly earnings growth above 6 percent.
- At 99.94, the national jobs index fell below 100 for the first time since September 2021.
- The South’s Job Index lead continued as it was the only region to top 100 (100.55). The South also led in hourly earnings growth, at 5.53 percent, and weekly earnings growth, at 5.00 percent.
- Small business employment growth in the West slowed 0.30 percent in August and ranked last among regions for the first time since 2020, with West Coast metros San Francisco, San Diego, Riverside, and Seattle all dropping more than two percent during the past quarter.
- At 102.89, other services (except public administration) remained the top sector for job growth for the third consecutive month. The sector had slowed over the past five months, but the pace of job gains remained strong at 102.89.
So Rosenberg is likely spot on with goods but the danger is in services as Bostic writes:
The dynamics are reasonably straightforward. If workers think they need to gird their finances against ongoing inflation, then they negotiate for ever-higher pay. In turn, firms will continue to raise prices to offset rising labor costs, which typically represent the biggest single expense for companies. This could trigger a self-perpetuating “wage-price spiral” like we saw during the Great Inflation of the 1970s and ’80s. Beyond that, if individuals believe prices will keep climbing, they are more likely to buy today while prices are relatively low, putting additional upward pressure on prices.
That’s why we pay such close attention to inflation expectations. If inflation expectations become what economists call “unanchored”—that is, they rise and stay high—then the Committee might have to take drastic action and tighten policy quickly and dramatically, possibly triggering severe economic disruption. While we haven’t seen expectations become unanchored—and recent readings in fact show them ticking down slightly—that risk grows the longer inflation stays high.
Evidence there points to rising expectations, at least among employers who are granting compensation between 5% and 6% as of Q2, and rising…
…even though declining productivity is boosting unit labor costs 9.5% in Q2:
Announcing the death of inflation appears premature, especially with employment still rising steadily.
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Job Openings Rose as Hiring Accelerated Demand for workers has remained well above the number of total available workers in a tight labor market that is showing signs of slight loosening
The Labor Department on Tuesday said there were a seasonally adjusted 11.2 million job openings in July, up from the previous month’s upwardly revised 11 million. Job openings have remained elevated and above 10 million since the summer of 2021. (…)
Hiring slowed slightly to 6.4 million, down from 6.5 million in June. (…)
Interestingly, hires per the JOLT report (blue) and employment per the BLS are trending differently:
Fed’s Williams Says Rates Will Stay High for a While New York Fed President John Williams says the central bank will need to push its short-term interest-rate target to a point where it will restrain the economy and maintain that stance for a while as part of its bid to lower inflation.
(…) I do think with demand far exceeding supply we do need to get real interest rates, that’s the interest rate adjusted for inflation, above zero. We need to have a, you know, somewhat restrictive policy to slow demand. And we’re not there yet.
So if you think about next year, if inflation is somewhere between 2½ and 3 percent – a lot lower than now, but that’s kind of the forecast that I think is reasonable – you’re thinking about having interest rates that are, you know, well above that, because it’s the interest rates minus the inflation rate tells you what the real interest rate is.
So we’re still quite a ways from that. And I think that, to me, that’s one of the benchmarks. That we need to get the interest rate relative to where inflation is expected to be over the next year, into a positive space and probably even, you know, higher than the longer-run neutral level – which I think is around a ½ percent on real interest rates. (…)
So when you look at the analysis we’ve done about what this long-run neutral interest rate is, it’s always in terms of a real interest rate for the reasons we just discussed. And again, a typical estimate of that is something like a half a percent. And so, if you add 2 percent inflation, that would be the 2½ that you see discussed as a longer-run, you know, neutral nominal interest rate because the Fed’s target is then 2 percent inflation in the longer run.
So the way I think about it, you know – and our economic analysis tends to support this – is, basically, where is the, you know, federal-funds rate less the inflation rates expected over the next year? So, to me, a real interest rate has to be forward-looking in that way. (…)
MR. TIMIRAOS: If there is a positive real rate of a half percent, that suggests that a nominal neutral rate might be 3, 3½ percent. Are you saying that we need – that you would need to go above 3½ percent to provide restraint to this economy?
MR. WILLIAMS: Well, I’m going to give the same answer as before: It depends on what happens in the data. And I think, you know – you know, you have to consider what’s happening with inflation and what’s happening with the economy. But I think that my baseline kind of view would be, yes, you do need to get a little bit – somewhat above that because you’re trying to get not just to neutral in a real interest rate sense, but you’re actually trying to get – pull – you know, get demand in line with supply. (…)
I do feel that, you know, next year, you know, because of the lags in monetary policy, because some of the highest of inflation, I think, are going to be somewhat persistent, we’re going to need to have restrictive policy for some time. This is not something that we’re going to do for a very short period of time and then, you know, change course. It’s really more about getting policy to the right place to get inflation down and keeping it in a position that helps make sure that in the next few years not only are we moving to 2 percent, but we achieve our 2 percent inflation goal on a sustained basis. (…)
Well, I think currently the [market is] pricing in about one rate cut next year right now. So and that’s going to depend on where things are. But honestly, from my perspective right now, I see us seeing needing to kind of hold this – you know, a policy stance of pushing inflation down. Bringing demand and supply into alignment is going to take longer than – you know, will continue through next year. So that’s my view right now. And I think it’s – you know, based on what I’m seeing in the inflation data, what I’m seeing in the economy, it’s going to take some time before I would expect to see any adjustments of rates downward. (…)
John Williams, perhaps the most influential FOMC member, makes it very clear in this interview:
- Monetary policy now seeks to slow demand and must therefore be restrictive.
- Real FF rates need to be >0.5% to be restrictive.
- So with inflation (presumably core PCE deflator) at 4.6%, FF become restrictive at 5.1%+, double where we are.
- If inflation declines to 3.5% by December, FF would be restrictive at 4.0%+.
- Policy will need to remain restrictive for a while to anchor inflation where we want it (2%).
Powell Abandons Soft Landing Goal as He Seeks ‘Growth Recession’
(…) Powell “buried the concept of a soft landing” with his Aug. 26 speech in Jackson Hole, Wyoming, said Diane Swonk, chief economist at KPMG LLP. Now, “the Fed’s goal is to grind inflation down by slowing growth below its potential,” which officials peg at 1.8%. (…)
In his Jackson Hole speech, he said the labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. That’s led to rapid wage rises that are incompatible with the Fed’s 2% inflation target.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labor market conditions” — widely seen as a euphemism for higher unemployment. (…)
Meanwhile:
Eurozone inflation rises to record 9.1% Core inflation: 4.3% vs 4.0%.
(Goldman Sachs Global Investment Research, Haver Analytics, ECB)
- France: Consumer Spending Falls Sharply Against Expectations
(INSEE, Haver Analytics, Goldman Sachs Global Investment Research)
Snap plans to cut 20% of staff on digital advertising downturn
China’s Property Market Has Slid Into Severe Depression, Real-Estate Giant Says Country Garden, which for years ranked as China’s top real-estate developer, reported a 96% drop in first-half profit and said the market has struggled with sluggish demand and declines in property prices.
(…) More than 30 Chinese real-estate companies, including China Evergrande Group and Sunac China Holdings Ltd., have already defaulted on their international debt. Many privately run developers this month issued profit warnings; some said they are expecting a more-than-90% decrease in net profit, and a few are expecting to post losses. (…)
China’s deflating property bubble has also spilled over into other sectors, including the countries’ privately run banks and its largest state-owned asset managers that specialize in managing portfolios of troubled loans and distressed debt. (…)
The company said the Chinese government is “faced with an increasingly complex, grim and uncertain development environment,” as it implements pandemic-control measures and tries to stabilize the economy. (…)
[Another] company, which is partly owned by China’s Ministry of Finance, described the country’s economic conditions as “extremely complex and difficult.”
Huarong’s international finance arm separately predicted that in the second half, China will face manifold challenges including pressure on investment, consumer spending and export trade. (…)
- China’s Factories Still Struggling as Power Cuts Curb Output The official manufacturing purchasing managers index rose to 49.4 from 49 in July, according to a statement from the National Bureau of Statistics on Wednesday.
(…) manufacturing PMI sub-gauges measuring output and new orders both remained in contraction. (…) The non-manufacturing gauge, which measures activity in the construction and services sectors, fell to 52.6 from 53.8 in July. (…)
- China Sets Mid-October Start for Congress to Extend Xi’s Rule The Chinese Communist Party’s twice-a-decade leadership congress will begin on Oct. 16, state media said, bringing President Xi Jinping a step closer to a precedent-defying third term in power.
Russia Halts Nord Stream Gas Pipeline European nations are racing to fill gas storage facilities before the onset of winter
(…) On Wednesday, the Kremlin-controlled gas giant Gazprom PJSC said that it had completely halted the Nord Stream pipeline as “scheduled preventive work begins at the gas compressor unit.” The pipeline is due to come back online early on Saturday. (…)
Some expect Moscow to find new technical pretexts to prolong the outage, while others see Gazprom keeping gas flowing at a low level to create uncertainty and manipulate gas prices. (…)
BNPL: Losses at Klarna quadruple as costs rise and credit losses grow
HP Warns of Slowing Business Spending as PC Sales Sag CEO Enrique Lores still sees long-term PC demand remaining above prepandemic levels for the computer-and-printer maker.
Best Buy Sales Drop as Electronics Spending Slows After comparable sales fall over 12%, the retailer cautions declines are likely in third quarter too
US Life Expectancy Sees Biggest Two-Year Decline in a Century
Overall life expectancy at birth declined by almost 3 years from 2019 to 2021 to 76.1 years, the lowest level since 1996, according to a report from the Centers for Disease Control and Prevention’s National Center for Health Statistics. (…)
While almost half of the 2020-2021 life expectancy decline can be traced to Covid-19, another 16% was related to unintentional injuries, with about half of those being overdoses of drugs such as opioids. The most recent data CDC data shows more than 109,000 overdose deaths in the year ending in March.
It was only the second time in a century that US life expectancy declined for two straight years, with a smaller dip coming from 1921-1923. Other causes of death contributing to the recent steep drop include chronic diseases and suicide. (…)
