SKINNING THE INFLATION CAT

• Core CPI (100% weight): +0.1% after 0.3% and 0.9%. Meaningful slowdown, +2.4% a.r. in last 2 months.
• Core Goods (26.2%): +0.3% after 0.5% and 2.2%. Nice slowdown, +4.9% a.r. in last 2 months.
• Core Services (73.8%): 0.0% after 0.3% and 0.4%. Noflation, +1.8% a.r. in last 2 months.

Great trends for the noflationists and Jerome Powell.

However, let’s dig in a little.

US consumer price inflation slowed in August, reflecting a moderation in the re-opening hotspots of the economy, where prices had been surging. Elsewhere, inflation pressures are broadening out while elevated inflation expectations risk keeping CPI well above target for much longer than the Federal Reserve currently anticipates.

(…) used car prices fell 1.5% while airline fares fell 9.1% and motor vehicle insurance fell 2.8% MoM. Car and truck rental plunged 8.5% and hotel charges were also down -3.3%. So effectively we have a moderation in the re-opening hotspots of the past four months. (ING)

This Bloomberg chart is revealing, particularly when focusing on the blue bars, those of the non-reopening components or, in Powell speak, the non-transitory inflation.

(Bloomberg)

Some details:

• Core Goods ex-Cars and Trucks (21.8% of core CPI): +0.7% after 0.5% and 0.6%. Steady inflation, +7.4% a.r. in last 2 months.
• Non-Durables ex-Food (16.6%): +0.8% after 0.8% and 1.4%. Steady inflation, +10.0% a.r. in last 2 months.
• Housing (52.7%): +0.4% after 0.4% and 0.4%. Steady inflation, +4.9% a.r. in last 2 months.
• Recreation (7.2%): +0.5% after 0.6% and 0.2%. Steady inflation, +6.8% a.r. in last 2 months.

ING adds:

Today’s National Federation of Independent Business (NFIB) survey showed a net 49% of small businesses currently raising prices and a net 44% of small businesses expecting to raise prices further in the coming months (both are at 40+ year highs). Remember too the key quote from last week’s Federal Reserve Beige Book…“Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead.”

NFIB data suggest price pressures are broadening out (prices charged 1975-2021)

Source: Macrobond, ING

Another key reason why we think inflation will stay higher for longer is housing costs. Primary rents and owners’ equivalent rent account for a third of the CPI basket with movements in these components tending to lag 12-18 months below house price changes. The chart below suggests that housing components of inflation will be the story to watch through the second half of this year and could add nearly a full percentage point to annual inflation on their own. This will more than offset any weakness in car and vehicle rental prices we are likely to see in coming months.

Rising housing costs to offset to price declines in re-opening hotspots

 

Source: Macrobond, ING

Two CPI indexes, Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent), measure the change in the shelter cost consumers receive from their primary residences. The BLS explains that “Because rents change rather infrequently, the CPI program collects rent data from each sampled unit every six months. The CPI divides each area’s rent sample into six sub-samples called panels. The rents for panel 1 are collected in January and July; panel 2, in February and August, etc.”

Hence, the slow crawl, until August, up 4.2% annualized after 2.0% on average since January:

On a YoY basis, the BLS’ Rent of Primary Residence is up 2.1% and OER 2.6% but in reality they are significantly more than that.

Apartment List just released its September report:

Our national index increased by 2.1 percent from July to August, a slight cool-down from 2.5 percent the month before, but nevertheless a continuation of rent growth that has persisted since the start of the year. Since January 2021, the national median rent has increased by a staggering 13.8 percent. To put that in context, rent growth from January to August averaged just 3.6 percent in the pre-pandemic years from 2017-2019.

Rents are now up more than 13 percent this year, more than doubling the overall rate of inflation.

If you wonder what’s Apartment List’s methodology, they use transacted prices and calculate rent growth rates based on a same-unit approach that controls for compositional changes in the rental stock. They also try to remove a potential luxury bias by using fully-representative median rent statistics from the Census Bureau’s American Community Survey.

We can digress about the impact of used car prices on the monthly CPI but people buy cars infrequently and rarely invoke car inflation when negotiating pay. On the other hand, they pay rent monthly and always invoke it, with food and gas and other energy costs, with their employer.

BTW, the CPI Food index is up 3.7% YoY and 7.8% annualized in the last 3 months. Gas: +42.7% YoY, electricity: +5.2%, natural gas: +21.1%. The Energy component of the CPI is actually 12.9% above its pre-pandemic level. Food: 6.4%.

Then there is Health Insurance, only 1.4% of core CPI, but down 9.1% annualized in the last 3 months and 9.9% YoY.

The Bureau of Labor Statistics estimates the “consumer price” of health insurance using a complex process based on changes in the profits of health insurers. The BLS measure focuses only on the direct cost to consumers even though most insurance costs are paid by employers.¹

The BLS measure is prone to large swings up and down. On the eve of the pandemic, the CPI-health insurance measure had been rising by more than 20% a year. But in the past 12 months, insurance prices—as measured by the BLS—have dropped by 10%.

That swing subtracted about 0.35 percentage point from the yearly change in the broader CPI inflation rate in August 2021 compared to February 2020.

Lastly, another interesting factoid: The U.S. average CPI rose 0.7% between June and August but only 0.3% in the Northeast region (0.0% in the NYC area) while the 3 other regions experienced inflation of 0.7-0.8% during the same 2 months. On a YoY basis, inflation in the Northeast was 4.4% in August, significantly lower than the 5.4% average in the other 3 regions.

It probably has to do with lagging employment in the Northeast, mainly in NYC, due to the impact of the stalled reopening on the restaurant and tourism industries. Hopefully transitory…

Inflation, however transitory, is also hitting the corporate world.

Monday, 3M presented at a Morgan Stanley conference. The stock lost 3.2% from its Monday high to yesterday’s close, after the CFO said that broad cost inflation on commodities, labor and logistics will pressure margins by 100-150 bps in Q3, worst than the 50-100 bps previous guidance. He said that cost inflation remains higher than 3M’s selling price inflation.

He also added: “I would say, our margin rate is somewhere in the 19% to 20%. But again, it’s 2 months in. We got a month to go, September is a big month for us.” September better be a very good month for them: since Q2 margins were 22.0%, a margin rate in the 19-20% range is a 200-300% cut.

• High Steel Prices Have Manufacturers Scrounging for Supplies Rapidly increasing metal costs are pushing manufacturers to take what steel they can get and hire more people to seek out available supplies.

(…) Rapidly increasing metal costs are pushing manufacturers to take what steel they can get and hire more people to seek out available supplies, company executives said. The rising costs are flowing through to some producers of consumer goods: Campbell Soup Co. CPB -1.07% is paying more to get the cans it fills with tomato soup; Peloton Interactive Inc. PTON -2.70% is seeing prices rise for parts that go into its stationary bikes; and Steelcase Inc. SCS -0.37% is paying more to make metal desks and filing cabinets. Car makers like Ford Motor Co. F -1.00% and General Motors Co. are also dealing with rising metal prices.

“It’s crazy for steel,” said Brian Nelson, president of HCC Inc., which sells large metal accessories to tractor manufacturers. “I can’t even get material at times.”

A Midwest steel index calculated by CRU Group estimated prices at $1,940 a ton at the start of September, up from around $560 in September for both 2019 and 2020. A U.S. government index tracking the price of steel and iron nearly doubled in August from the year before, the biggest relative increase since records began in the 1920s.

The higher costs are already hitting consumers, especially for products like cars and appliances. Household appliance prices rose by 6.8% in August, the highest year-over-year increase in a decade, according to Labor Department data. (…)

HCC’s Mr. Nelson said he has so far been able to pass along much of the higher steel costs through monthly price increases that his biggest tractor-making customers are accepting. Even so, he worries that steel costs will keep going up while his customers hit a limit on what they are willing to pay, leaving him stuck between metal suppliers and big tractor producers. (…)

Steel production in China, which makes more than half the world’s steel, is projected by analysts to decline in the months ahead, partially because of that country’s efforts to cut carbon emissions. (…)

About 9 million tons of annual sheet-steel capacity is being added to the U.S. market over the next couple of years. That equates to about 15% of annual domestic sheet-steel consumption. The new, efficient mills are expected to push down steel prices with their lower operating costs, drawing customers away from older, high-cost mills that need higher steel prices to remain profitable. (…)

Mr. Harpenau said he recently hired a fourth supply-chain employee to help track delayed orders, monitor price increases and other issues—a hire he said he should have made months ago, given the recent price increases and supply disruptions.

“We believed this was going to be more temporary in nature,” he said.

• Supply-Chain Strains Hit Prices, Inventories of Artificial Christmas Trees High shipping costs and delivery delays have merchants raising list prices and warning of shortfalls in holiday decorations. Some U.S. retailers are raising prices by 20% to 25%.
• “All told, the average price of the new iPhones introduced Tuesday comes in at around $1,106—nearly 11% higher than the $999 average of last year’s new models.” (WSJ)

The other side of the inflation debate: consumer spending:

• What’s Your Raise Really Worth? Inflation Has Something to Say About It. For the lowest-paid Americans, real wages—adjusted for rising prices—fell 0.5% in August from a year earlier; ‘I’m just kind of scraping by’

Troy Sutton, age 61, lost a job as a custodian at the start of the pandemic in 2020 that paid $12 an hour, and he spent more than a year unemployed. This past summer, he landed a job as a custodian at the University of Pennsylvania he said pays $18 or more an hour.

But Mr. Sutton’s water, electricity and cable bills are higher than a year ago, he said. He is shelling out more for veterinary checkups and dog food for his two Chihuahuas, Princess and Precious. At the supermarket near Mr. Sutton’s house in Philadelphia, eggs climbed from about $2 a dozen in 2019 to $3.69 during the pandemic.

He and his wife started shopping more at supermarket chain Aldi this year, where many groceries are cheaper, he said. But the longer drive and higher gas prices have eaten up some of the savings. He has also cut out brand-name cereals, rice, oatmeal, ketchup and mustard.

“I’m making more money. I should be able to see it,” Mr. Sutton said. “But I don’t see it because I’m paying more money for stuff now.” (…)

Simple math: total CPI is up 5.2% YoY in August. The Atlanta Fed’s wage tracker, which takes care of compositional biases, is up 3.9% YoY. One of the two series needs to be transitionary, or consumer spending, 70% of the economy, will tank.

John Authers:

(…) So, there is definitely more to this inflationary episode than a freakishly low base effect. At least in that sense, this isn’t transitory. (…)

Small Business Optimism Increased Slightly in August

From Bespoke:

(Bespoke)

China’s Economic Recovery Is Looking Gloomier Growth across a range of Chinese economic indicators pulled back sharply as a new Covid-19 outbreak and tighter government regulations on the property market hit consumer spending and the housing sector.

Retail sales, a key gauge of China’s consumption, rose just 2.5% in August from a year earlier, down sharply from July’s 8.5% year-over-year growth, according to data released Wednesday by China’s National Bureau of Statistics. The result marked the lowest pace of growth in a year and missed by a large margin the 6.3% increase expected by economists polled by The Wall Street Journal.

Separate data released Wednesday by the statistics bureau showed home sales by value falling 19.7% in August from a year ago, the largest drop since April 2020—at the height of the pandemic. Average new-home prices in 70 major Chinese cities inched 0.16% higher in August from the previous month, the smallest such gain this year.

Real-estate investment in the first eight months of the year, meantime, increased 10.9% year over year, slowing from a 12.7% gain in the January-July period. Construction starts, as measured by floor area, dropped 3.2% in the January-August period, accelerating from a 0.9% year-over-year decline in the first seven months of the year. (…)

A 5.3% year-over-year rise in industrial output in August marked a deceleration from July’s 6.4% increase and fell short of the 5.6% growth pace forecast by surveyed economists. It was the slowest growth rate in more than a year.

Fixed-asset investment, meantime, increased 8.9% in the January-August period, compared with the 10.3% pace recorded in the first seven months. Economists expected the figure to grow by 8.8%. (…)

Perhaps most worrying for the retail sector is the timing of this latest wave of cases, which comes just days ahead of two long holidays—Mid-Autumn Festival and National Day—that are typically a boom time for tourism and spending. (…)

ING:

The consensus forecast for retail sales was 7% year-on-year. It came in at 2.5% YoY. This shows how inbound tourism has been affected by even localised lockdowns after a small number of Covid cases were found. People are clearly worried that they could get trapped in tourist destinations if Covid cases emerge, and have therefore been less keen to travel across provinces over the summer holidays.

A rebound in retail sales growth is expected in September as Covid cases have been limited in Fujian.

But we are starting to worry that government policies are hurting the job market and as such, sentiment around spending could come under pressure. This should be reflected in moderate growth in retail sales from September to at least the end of 2021, unless some of those policies are unwound, which is very unlikely.

China retail sales weakened quickly

Whether in terms of investment (-4.4% YoY year-to-date), production (-12.6% YoY) or sales (-7.4% YoY), automobiles contracted on a year-on-year basis. Chip shortages are the main reason behind this. And there is no indication as to how long this will last.

So far, the damage from chip shortages is most obvious in automobiles, but we expect it could also affect sales of smartphones. Though smartphones are not as durable as cars, they share some similarities. Consumers can defer upgrading their phones if new versions are similar to their existing phones, and they want to save rather than spend. (…)

China investment by sectors

We forecast a broad based RRR cut of 0.5 percentage points in October. Today’s weak data and the cumulative impact of policies mean the economy needs more liquidity to lessen the impact of rising credit premiums. (…)

FYI:

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