Monday, February 20, 2023

Is INFLATION WATCH back? Not till we see Feb's numbers

Oh no! After the news from last week, is INFLATION WATCH back? The concerns started last Tuesday with a hotter-than-expected number for the Consumer Price Index.
The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing. The food index increased 0.5 percent over the month with the food at home index rising 0.4 percent. The energy index increased 2.0 percent over the month as all major energy component indexes rose over the month.
Concerning, but the energy increase was a one-time bump that has since leveled off and somewhat reversed. And the food index increases actually indicate a calming after a double-digit rate of inflation for much of 2022, with food at home continuing to see smaller increases in recent months.

It’s shelter that is now the large-ticket item that keeps going up. But as this CNBC report from October notes, that shelter figure can be misleading, and represents a reaction to events from several months ago vs the cooled-off market that we may be seeing today.
The CPI for “shelter” has historically lagged home price changes by four quarters, which suggests that shelter “will continue to put upward pressure on overall inflation through the first half of 2023,” according to [Cristian] deRitis, [deputy chief economist at Moody’s Analytics].

The lag effect is largely due to how long it takes for leases to roll over into a new contract. Landlords typically renew leases every 12 months, which means current price dynamics won’t be reflected in new contracts for a year.

In this sense, housing is somewhat of an outlier among other CPI categories. Consumers don’t agree to pay the same price for chicken or eggs for a whole year, for example…..

And rent tends to be “sticky,” according to economists — which means the total dollar amount of one’s monthly rent generally doesn’t decline; it tends to stay the same or increase with each new lease.
So you can expect that CPI shelter number to fade downward in the coming months.

Similar to consumer prices, the producer price index had a sizable increase last month, especially in goods.

The index for final demand goods moved up 1.2 percent in January, the largest increase since rising 2.1 percent in June 2022. Most of the January advance is attributable to a 5.0-percent jump in prices for final demand energy. The index for final demand goods less foods and energy increased 0.6 percent. In contrast, prices for final demand foods fell 1.0 percent.
That producer-level decline in foods is an especially good sign going forward, with big drops in fresh/dry vegetables (-33.5%), and the first reversal of the huge spikes in egg prices (down 12.7% in Jan, but producer prices have still tripled since Jan 2022).

Writing in Monday’s Miilwaukee Journal-Sentinel, UW-Milwaukee Professor Jeffrey Sommers says that many of the inflationary pressures that drove prices up in 2022 have gone away, and are now reversing.
Recently, I wrote that non-core inflationary items, e.g., food and fuel, saw price growth slowing in some sectors, and dropping in others. Energy prices have fallen substantially from their summer peak when war in Ukraine not only disrupted global fuel supplies, but also grain.

Those threats now look to be in the rear-mirror. Meanwhile, energy producers have finally got off the bench and begun drilling again. Grocery giants, such as Whole Foods, are starting to confront food processors that have kept prices high despite unprocessed food prices dropping, thus adding another new downward pressure on food prices.
To go along with Sommers’ point, take a look back at the Producer Price Index report, and see what happened to unprocessed food prices in January.
The index for unprocessed goods for intermediate demand fell 5.0 percent in January following a 1.5-percent rise in December. An 8.5-percent decline in prices for unprocessed energy materials accounted for 70 percent of the January decrease. The index for unprocessed foodstuffs and feedstuffs moved down 4.7 percent. Conversely, prices for unprocessed nonfood materials less energy increased 0.9 percent. For the 12 months ended in January, the index for unprocessed goods for intermediate demand rose 2.3 percent.

Product detail: Over 60 percent of the January decline in prices for unprocessed goods for intermediate demand can be attributed to the index for natural gas, which dropped 19.1 percent. Prices for ungraded chicken eggs, crude petroleum, slaughter chickens, slaughter hogs, and recyclable paper also decreased. In contrast, the index for nonferrous metal ores rose 4.5 percent. Prices for raw milk and for coal also advanced.
So while producer prices for products like energy and grain-based foods went up for final demand in January, prices for those same products fell closer to the source. So unless someone is making a gouge-level of profits in the middle, final demand prices and consumer producers should be moderating and possibly falling in the next 2 months.

Sommers also points out that the cost to ship products has fallen, as COVID-era and Ukraine-related disruptions have eased, with shippers responding to the added demand.
The container price increase from $4,000 to $20,000 was bad enough, but the added cost of inventories sitting for failure of capacity to ship added additional upward price pressures, time is money, after all. This massive price uptick led to orders for new ships, many of which are coming online now.

Prices for shipping on average have now already returned to normal levels. As Rolf Habben Jansen, the CEO of the world’s fifth largest shipping company, Hapag Lloyd, recently said, "The party is over. We are back to a normal shipping business."

Sommers ends his article by saying that the Federal Reserve should not follow the misleading bump up in prices for January and stop its hawkish pose against inflation that isn’t continuing in February, and isn’t likely to come back for 2023.
In short, prices for non-core and core items are either dropping, or seeing increases slow. The Federal Reserve’s now eighth increase in interest rates privileged the interests of select investors whose returns are dependent on keeping wages low. Yet, many indicators suggest the inflationary threat is behind us. At minimum, the Fed should reject further interest rate hikes as price growth slows. I'd agree with this, but after the PPI numbers hit last Thursday, Wall Street traders became convinced that more rate hikes were coming in March and future months. And felt that would hurt the overall economy.

That feels like an overreaction to me, as I also think that inflation is still trending lower, and will be lower than the 5% Fed Fund rate that the Fed is likely to hit in the Spring. But one month of higher numbers made some people forget about the lower inflation that we had seen the entire last half of 2022, and the unknown direction that this mentality causes could lead to more volatility than we should have. Makes the next month of data all the more critical.

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