Another month passes, and once again hopes are shattered that we have reached the peak of US inflation (peak inflation).
Last Friday, and earlier this week, global markets fell sharply with the release of the US Consumer Price Index (CPI) for May, which stood at 8.6% compared to last year, again a new 40-year high. Expectations on Wall Street were actually to slow down Inflation, albeit slightly, compared to the 8.3% figure published in relation to April. Well, then it turns out that the same forecasts for the peak of inflation are still too early, given what is happening today in the energy, food and housing markets. Monetary policy has a very limited capacity to cool down – the prices of these products continue to climb sharply, and more specifically, the fighting in Ukraine continues to support the very high price levels of food and energy.
One can understand why the markets are so apprehensive: History shows that the Fed has great difficulty in making “soft landings,” that is, cooling inflationary pressures without tipping the U.S. economy into recession in the end. In fact, since 1945 the Fed has only been able to make soft landings three times, and has never been able to do so when trying to fight inflation as high as it is today.
It is a bit surprising to find that there is still no easing of inflationary pressures on the products / commodities side of the economy. The thesis that consumers will divert demand from products / goods, where there are known to be acute shortages in supply, to services – in fact, the impression is created that this thesis is indeed coming true in reality. But in fact the CPI data for May, which were published last Friday, did not show any relief from inflationary pressures on product / commodity prices.
So what can you be a little optimistic about?
First, the published inflation data are historical, meaning they present what was and do not foresee. What does the future hold? Take the case of Target (NYSE: TGT), one of the U.S. retail giants. Target has already managed to issue two profit warnings in the past month, amid a not-so-simple problem of excess inventory created in the company that will force it to drop prices (Target reported a jump of 43 % In its stock during the last reporting quarter).
Target’s interesting story probably represents: the severe and persistent disruptions in supply chains have caused many retail companies to accumulate inventory in order to meet demand. Now that it is clear that the sharp trend of raising interest rates is causing over-caution in consumer behavior, those retailers may get stuck with significant excess inventories, forcing them to lower selling prices. According to Bloomberg data from the end of May, inventory levels rose by 26%, or about $ 45 billion, among companies in the consumer products sector that are included in the S&P 500 index and have a market value of $ 1 billion or more. It is clear that there is an increased risk of overfilling in luxury and non-discretionary consumer goods – Target also noted that the significant increase in the price of basic consumer goods means a contraction in expenditure on non-essential consumer goods (discretionary). But it will probably take several months for price reductions by consumer retailers to seep into official inflation data.
Second, the slowdown in economic activity in China today, in part in the face of stricter corona restrictions, is creating a deflationary effect. Thus, for example, according to calculations made by Bloomberg, a slowdown of 1% in Chinese industrial output could lower global oil prices by 5%.
Third, there are indications that real estate prices, in the US and worldwide, are cooling. According to data from the International Bank for Settlement (BIS), the rise in world house prices slowed already during the fourth quarter of 2021, to an annual rate of “only” 4.6%, compared to 5.4% in the previous quarter.
Bottom lineAlthough recent inflation data released last Friday suggest that high US inflation is still “sticky”, there remains a reasonable scenario that there will be a significant drop in the US inflation rate in the foreseeable future, which will likely be perceived by investors as excellent news. Some relief from US inflationary pressures is certainly expected, the big question is just when exactly …