Is inflation a long term problem

Deflated.  Stocks sold off yesterday amidst confusion over the real impacts of inflation.  CPI was not as hot as expected but inflation is still a problem and traders sold shares on fears that corporate profits will be impacted by higher costs.

N O T E W O R T H Y

Well worth it.  Yesterday’s print of the Consumer Price Index was somewhat of a surprise.  At first it appeared to be a positive development but ultimately traders agreed that inflation is not good, so they took to selling stocks, erasing early-session gains.  So, what really happened yesterday?  Let’s start with numbers themselves.  Month over month, the CPI registered a +0.3% gain.  Economists were expecting a +0.4% gain, so from that perspective, we will call it positive.  Another positive is that the monthly change was less than July’s +0.5% growth, so we can interpret that as a possible sign that inflation growth may be stalling.  If we look at those numbers excluding food and energy, the story even looks rosier with Core CPI rising just +0.01%, less than the expected +0.3% increase.  For many, that would be good enough to call it a good release… bullish for stocks.  Of course, nothing is that simple. The first question we need to ask is whether the slower than expected monthly gain is enough to move the needle in the Fed’s debate over near-term tapering. Taking a step back and looking at the yearly growth numbers, we see the CPI rising by +5.3%. PERSPECTIVE ALERT:  The last time we had a CPI higher than 5% was in 1990.  My 23 year old son was only 2 years old and my 26 year old daughter was only 5 years old.  Yeah, that makes it around 21 years ago.  Many economists have waved off this year’s inflation as transitory, meaning that it won’t last long. They expect the surge in demand, post-lockdown to eventually return to normal.  Additionally many expect the supply chain problems to eventually right themselves, though the actual time associated with the term “eventually” seems to be a moving target, mostly moving farther out.  Ok, so even if you go with the transitory theme… WE ARE STILL PAYING MORE FOR THE THINGS WE BUY MOST… +5.3% more than last year, to be exact.  So unless you are making at least that much more than you were last year at this time, your hard-earned salary, fixed pension, or fixed rate bond portfolio is worth less.  No problem right? Imagine if you went to the grocery store and suddenly noticed that your loaf of White Bread (+2.5%) was only 97.5% the size it was last fall.  Ok, so you are on a low carb diet.  Steak is a good solid protein.  Sorry, the 8 oz steak you had last year will only come in at 6.7 ounces (+16.6%) this year. Maybe you can seek out a healthy piece of fish instead.  For the same amount as you spent last August, an 8 oz salmon fillet will only come in at 7.2 ounces today (+10.6%).  I hope you are not too hungry.  Many cite the core CPI as being the number to watch due to the volatility of food and energy prices.  In reality, all of us need food to thrive and most of us need energy to heat our homes and to drive to work.  Gasoline will cost you +43.9% more than last summer, so if you use your car to commute, your take-home pay after expenses will be far less.  If you are traveling, a hotel stay will cost you +19.6% more and a car lease will cost you +52.6% more than last August.  To get further perspective we can look at the monthly change in those two numbers.  Car leases got cheaper by -8.5% from July to August, and hotel stays were cheaper by -3.3%.  That should provide some comfort, albeit cold comfort.  The lower cost of hotel stays is likely the result of decreased travel due to the Delta surge.  Airline fares were down by -9.1% month over month, also the likely result of the Delta surge.  So what are we to make of all this?  Monthly price growth may be subsiding somewhat, but inflation is still high and affecting our lives on many levels.  The Delta variant surge has certainly impacted our consumption patterns which will affect corporate performance. Does the lower month over month numbers suggest that inflation is transitory and that prices will soon go back down to normal?  If we look at last Friday’s Producer Price Index for some answers we might get some clues.  PPI reflects prices paid by producers and those numbers came in hotter than expected.  PPI grew by +8.2% year over year in August, higher than July’s +7.8%. Where producers have not yet passed those increased costs on to us consumers, you can rest assured that they will eventually, suggesting that we are far from out of the woods when it comes to inflation.  Maybe you can drown your sorrows with a nice cup of coffee and a cupcake… sorry those will cost you +2.3% and +3.8% more than last summer.

THE MARKETS

Stocks sold off yesterday as investors came to grips with the real costs of inflation.  The S&P500 fell by -0.57%, the Dow Jones Industrial Average lost -0.84%, the Nasdaq Composite gave up -0.45%, and the Russell 2000 dropped by -1.37%.  Bonds rose and 10-year treasury yields dropped by -4 basis points to 1.28%.  Cryptos gained +2.87% and Bitcoin climbed by +3.63%.

NXT UP

– Empire Manufacturing (September) may have fallen to 17.9 from 18.3.

– Industrial Production (August) is expected to have advanced by +0.5% after climbing by +0.9% in the prior month.