The topic du jour blowing up the VettaFi Slack is yesterday’s inflation data. While the latest CPI print came in lower than expected, 7.75% isn’t anything to sneeze at, either. So what does it all mean?
Naturally, our VettaFi voices have opinions. Lots of them. What follows is a transcript of our conversation, lightly edited for clarity and length. (And if you want just the facts, ma’am, without all the crystal ball, be sure to check out Jill Mislinski’s deep dive into the numbers: Consumer Price Index: October Headline at 7.75%, Smallest YoY Increase Since Jan 2020.)
Todd Rosenbluth, head of research: I would expect the Fed to hike only 50 basis points next time, based on the new data and on their comments in prior, less-hawkish statements that they would potentially let prior rate hikes sink in. Powell walked some of this back, but still…
With the unemployment rate for October ticking up slightly to 3.7% and inflation beginning to ease, the Fed has initial data to take a less aggressive approach. The yield on the 10-year Treasury bond fell on Thursday by more than 30 basis points to 3.8%, which is consistent with expectations of a more gradual pace of rate hikes.
Roxanna Islam, associate director of research: There’s a lot of talk about improvement in goods inflation versus an increase in services inflation. But there’s still a lot of underlying supply chain issues, so I don’t think goods inflation will disappear that quickly.
Consumer demand is cooling down a bit, so that helps bring goods prices down, but most corporations are still dealing with higher wages and shipping costs. 50 bps vs. 75 bps for the next Fed hike seems to be consensus, and I agree.
But I’m still a pessimist regarding the inflation cooldown, personally. China locked down Guangzhou for COVID yesterday, which is a large global manufacturing hub for automobiles and electronics. I’m finally trying to upgrade my iPhone X, which barely works, so I ordered an iPhone 14 a couple of weeks ago, but it might not be here until end of December.
Dave Nadig, financial futurist: The CPI print is not at all surprising. We’re sliding towards something like long-term 4% structural inflation. We won’t get consistently under 3% for years (my bar bet with quite a few folks).
The labor reset doesn’t go away. Consumer demand will come down as employment softens; you can’t just keep firing 20% of tech companies’ workforce without it starting to impact sales.
The supply chain stuff is very real, but from an inflation perspective, all that matters is whether it drives replacement buying. Roxanna not getting a phone till December isn’t causing them to INSTEAD buy something they can find at a higher-than-normal price (i.e., inflationary); instead, it’s causing a DELAY of revenue recognition, which is actually a decline in economic activity (deflationary).
For example, in autos, used cars smashed the inflation numbers, but that’s all unwinding VERY rapidly. If you get rid of all that time-shifting and replacement-buying, what you’re left with is labor, the work-from-home transition, a permanent shift in the goods/service mix, money supply issues, and the reaction function of commodities.
Islam: Supply chain disruptions lead to more than just replacement buying, though. Transportation costs continue to be a huge cost for corporations (although not as bad as the past couple of years). When transportation costs get higher, companies need to pass through those costs to consumers. At a certain point, prices are too high and consumers won’t buy. That’s when they start looking for ways to cut expenses instead: for example, “strategic restructuring,” which includes layoffs and hopefully other corporate changes, because layoffs alone won’t do much. (I write about this in this week’s Thematic Times: Not Yet Laboring Over Labor News for Thematic Constituents.)
I’m also biased, being a transportation analyst for so many years, that supply chain/freight transportation is the backbone behind everything!
Nadig: The other real truth is that greedflation exists. A significant, difficult-to-measure component of current inflation is the higher-than-historical retail margins. Lael Brainard had some comments on that recently. It’s a real thing. All the focus is on energy, but that’s actually just cyclical; if you average earnings on the sector over the past 10 years, it’s below the S&P. But in consumer goods and services, actual margins are indeed way up.
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