Inflation Hits 9.1% as Prices Rise Broadly Across Economy Gasoline costs lead biggest rise in CPI since November 1981
(…) Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said. On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May—a sign of inflationary pressures throughout the economy. (…)
The analysis of this June CPI is easy: wherever you look, it’s bad.
(Cleveland Fed)
CPI “ESSENTIALS”
June core CPI rose by 0.71% MoM, the fastest pace in a year. The breadth of core inflation increased further, with 6-month annualized inflation now above 6% for 42% of the basket.
Goldman Sachs: “Shelter categories surprisingly accelerated further (rent +0.78%, owners’ equivalent rent +0.70%).”
How GS economists let themselves get surprised by rent is in itself a big surprise. They should have been on top of it given that, as they say, “shelter is one of the largest and most persistent inflation categories.”
The media are full of pundits explaining how goods inflation will come down, forgetting that services are where the danger is.
- core goods: +0.8% after +0.7% in May
- core services: +0.7% after +0.6%
- shelter: +0.6% after +0.6%
- Services less rent of shelter: +1.1% after +0.9%
Shelter is 32% of the CPI and 41% of core CPI. There is an acute and lasting shortage of dwellings which will continue to pressure shelter costs until unaffordability really kicks in. That is happening in housing, but that’s pushing people to rentals, also in short supply. Rent affordability is tied to wages which impact most other services.
Services ex-shelter is 28% of CPI and 36% of core CPI. Inflation there is +6.9% YoY in June but it has exploded 13% annualized in the last 3 months.
The Fed’s main problem is with the blue bars in this Bloomberg chart:
Goods prices can fluctuate, up and down, but services prices barely flinch even in the worst recessions.
And they only flinch when wages flinch, which only happens when employment flinches, which only happens during recessions.
So a recession we will get, or are getting. Consumer spending is about 70% of GDP and housing is 5%. This chart plots MoM changes in real wages. There have been only 5 positive months in the last 2 years:
Generally, Americans spend what they earn, more or less. Say what you want, like “what about those excess savings?”, this is no friendly trend:
Hence:
- Are We in a Recession? 2 in 3 Voters Say Yes
- A Mild US Recession Is Coming This Year, Bank of America Economists Say Services spending is slowing and hot inflation is spurring consumers to pull back.
(…) BofA joins Wells Fargo Investment Institute and Nomura Holdings Inc. in expecting a recession in 2022. Economists at Deutsche Bank AG, one of the first major banks to forecast such a contraction, see one starting in mid-2023.
The BofA economists expect fourth-quarter US gross domestic product to decline 1.4% from a year earlier, followed by a 1% increase in 2023. This should raise the unemployment rate by 1 percentage point to about 4.6%, which will help inflation moderate. (…)
The BofA economists’ forecasts put inflation broadly in line with the Federal Reserve’s 2% mandate by the end of 2024. (…)
Cass Transportation Index Report June 2022
- On a seasonally adjusted (SA) basis, shipments fell 4.1% m/m in June, reversing the 4.0% increase in May.
- Inventory has shifted from a major tailwind for freight demand to more of a neutral factor currently, with potential to become a considerable headwind if goods demand continues to decline.
- Normal seasonality from this index level would imply shipments down 1% y/y in Q3 and down 5% y/y in Q4, as the current soft patch is becoming increasingly clear in the data.
Silver lining in the CPI report?
Core CPI is easing sequentially:
And business owners are no longer able to pass their costs increases down the pipe as the recent Atlanta Fed survey suggests:
Business Inflation Expectations Relatively Unchanged at 3.7 Percent
Unit costs keep rising but …
…pass through is not what it’s just been, is it?
Because sales are weak and weakening:
The resulting margin squeeze could last a while:
U.S. Economy Slows in Several Parts of the Country, Fed’s Beige Book Says Business contacts also raised concerns about the possibility of a recession.
Throughout the country, prices for food and energy rose, according to the beige book, which is a compilation of economic anecdotes collected through July 13. (…)
“Increases in food, commodities, and energy (particularly fuel) costs remained significant, though there were several reports that price inflation for these categories had slowed compared with recent months but remained historically elevated,” the Federal Reserve said.
The Fed report said business contacts in several districts “noted concerns over an increased risk of a recession” and that much of the country saw a pullback in consumer spending due to higher gasoline and food prices. (…)
“Rising costs were squeezing some retailers’ margins,” the Fed said. (…)
“Overall outlooks were pessimistic and highly uncertain due to supply challenges and expectations of weaker demand ahead,” the Fed said.
In the Boston Fed district, several firms instituted “large or very large” price increases, or were planning on imposing them soon. (…)
In the Philadelphia Fed district, conversations about a future recession are getting louder. “Increased chatter about a future recession has caused growth in employment, wages, and prices to subside a bit,” the report said.
(Bespoke)
Canada goes all in with 100bp hike The evident concern at the BoC implies upside risk to our forecast of a further 125bp of rate hikes before the end of the year
This takes the policy rate up to 2.5%, matching the New Zealand official cash rate after the RBNZ hiked 50bp overnight. It will put the pressure on the US Federal Reserve to follow suit, but for now we stick with our 75bp call for July 27th. Canada’s economy is arguably in a firmer position given the jobs market is even stronger than the US’ (employment well above pre-Covid peak) and the commodity exposure suggests more resilience in the current economic environment than the US where recession fears are clearly on the rise.
The BoC statement highlights the breadth of price pressure, commenting that “more than half of the components that make up the CPI are now rising by more than 5%” and the surge in inflation expectations, “more consumers and businesses are expecting inflation to be higher for longer”. The fear is this becomes embedded which “If that occurs, the economic cost of restoring price stability will be higher”.
They also cite “further excess demand” having been built up in the economy, but have cut their growth forecasts for next year due to tighter monetary policy. They have described today’s action as a “front load” move, which implies this is a one-off aggressive hike, but indicate that “interest rates will need to rise further” with the central bank “resolute in its commitment to price stability”.
We are currently forecasting 50bp hikes in September and October with a 25bp move in December. This would take the policy rate up to 3.75% by year-end, but the odds are certainly moving towards a more aggressive move in September at the very least, especially if inflation shows little sign of abating.
Naturally, this morning:
Inflation Scorcher Opens Path for Fed to Weigh 100-Basis-Point Hike
(…) “Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday after US consumer prices rose a faster-than-forecast 9.1% in the year through June. Asked if that included raising rates by a full percentage point, he replied, “it would mean everything. (…)
Cleveland Fed President Loretta Mester, speaking Wednesday evening in an interview on Bloomberg Television, (…) said there was “no reason” for raising rates by less than the 75 basis points that policy makers delivered last month. (…) “We at the Fed have to be very deliberate and intentional about continuing on this path of raising our interest rate until we get and see convincing evidence that inflation has turned a corner.”
San Francisco Fed chief Mary Daly, speaking in a separate interview with the New York Times late Wednesday, said that “My most likely posture is 0.75, because of the data I’ve seen,” (…).
Both Bostic and Mester pushed back against the idea of a trade-off between inflation and employment, arguing that they had to deliver price stability, even if that hurts the labor market. (…)
- Draghi’s Italian government could collapse as 5-Star rebels
- Credit Managers Say Defaults on Track to Rise on Four Continents
- China property protests threaten to dent $220 bln of banks’ mortgage loans
- Argentines Brace for 90% Inflation After Economy Minister’s Exit
PEAKFLATION?
While nobody does, it’s time to talk about transitory inflation.
- Current inflation numbers, including 10.4% on “essentials”, are necessarily impacting demand.
- Add major central banks’ recent loudly broadcasted resolve to quickly kill the “inflation dragon” with repeat oversize rate hikes…
- …you get an even greater hit on final demand, aggravated by excess goods inventories, which spreads to manufacturing and commodities…
- …which spreads to reduced overall activity, including in services…
- …all of which hit labor demand, which then hits wages., which slows inflation on services.
This happens gradually, then suddenly.
The biggest, perhaps only, uncertainty is with oil prices because of the war and politics. Since 1995, inflation is 68% correlated with oil prices.
Normally, headline inflation should soon drop but in 2001, the lag was 12 months, in 2005-06, 18 months, in 2011, 4 months. Most other times, inflation declined almost in sync with WTI. It has now been about one year…
But if WTI neatly breaks $95, the relief will begin to be felt.
JPMorgan Halts Share Buybacks as Earnings Miss Estimates
(…) JPMorgan added $428 million to the pile of money it set aside for potentially sour loans, reflecting “a modest deterioration in the economic outlook.” That marks a reversal from last year, when the firm’s results were padded by a $3 billion reserve release. (…)
Investment-banking fees declined 54%, more than the 47% drop analysts predicted, as dramatic market moves in the quarter stymied dealmaking. That division was also hurt by $257 million of markdowns on held-for-sale positions in the bank’s so-called bridge book, according to the earnings statement.
Trading revenue jumped 15% to $7.8 billion, the New York-based company said, while analysts had expected a 17% increase. (…)
JPMorgan said regulators will require its common equity Tier 1 ratio to be 12.5% by the first quarter of next year, due to a harsher stress-test result and a previously flagged increase to its buffer for systemic importance. That’s up from a minimum of 11.2% at the end of June, and significantly higher than the 11.7% requirement that the firm told investors just two months ago to expect for early 2023.
The buyback pause should allow the bank to get to 13.2% by next March, comfortably clearing regulators’ bar. But that comes at the cost of handing back money to investors: JPMorgan had averaged about $2.2 billion of buybacks a quarter over the past year, on top of $3 billion a quarter of dividend payments.
The firm’s net income fell 28% to $8.6 billion, or $2.76 a share. Analysts were predicting $8.9 billion.
JPMorgan’s non-interest expenses rose 6% to $18.7 billion, lower than analysts were expecting. The firm’s costs have been a focal point for investors after executives said they expect an 8.6% increase this year.
Net interest income, a key source of revenue for JPMorgan, rose 19% in the second quarter on higher interest rates and loan growth. Analysts had expected a 16% increase.