CAMS Weekly View from the Corner - Week ending 8/16/24
August 19, 2024
On a personal note an excerpt from a large news/market oriented outlet came across my screens late last week offering we have ebbing price inflation in conjunction with a resilient consumer.
The brief note continued with the view that this put “frightened investors to shame” as it all assuredly offers a proverbial soft landing engineered by the Fed. (Just to be clear this was their brief view and language not my own.)
This all implied a wealth of downstream assumptions such as price inflation is a non-issue (maybe it will be - downstream) the economy is going to be just fine with growth as far as the eye can see (assumption built into “soft landing” lingo) and the markets, specifically the stock market, will trend upward and onward without missing a beat.
This all courtesy of the assumed soft landing wrapped up in a blanket of continual Fed rate cuts.
As offered by the aforementioned labeled “frightened investors,” the implied expectation is they will come to see the silliness in their concerns as implied by them being “put to shame” as they will see this soft landing (also often labeled “goldilocks” – think just perfect) and realize their collective mishap of dropping stock prices over the previous several weeks.
With the above let’s take an updated look at the general described landscape via some items of interest relating to the above economic views that lit up my screens late last week.
Last week the price inflation landscape was updated with a new release of the Consumer Price Index (CPI) and all its sub-categories. CPI improved albeit marginally as the year-over-year growth rate is now 2.92%. We are being precise in order to note the marginal improvement. For comparison the previous release registered the result at 2.97%.
What is noteworthy is we are finally holding below the 3% level albeit marginally. Progress is progress and yet at the same time 2.92% is not close to the Fed’s 2% goal.
Drilling down just a bit within the Consumer Price updates the often noted Consumer Price Index Less Food & Energy measure is displayed above for the previous decade. This metric is often referenced alongside CPI updates as it is meant to give a sense of what “core” price inflation looks like.
Food and energy is stripped out in light of those two broad components historically being more volatile in their pricing. By doing this we get a sense of what the historically and relatively speaking more stable pricing areas of the economic landscape are registering.
As a side note there are better measures to use in order to drill down into the pricing landscape of which we have shared in numerous editions.
For today’s edition though we share this often referenced mainstream measure in order to offer a refute to the view that our economic landscape has moved into the soft landing/goldilocks sphere – think no price inflation and a strong consumer with economic growth trending on an upward trajectory - just perfect.
Our chart above offers a red horizontal line that denotes the general high water marks of this price inflation measure over the previous decade.
Those high points register a touch above 2%. As the chart depicts we would then customarily witness a retreat to 2% and often below. Current day the chart visually offers we remain well north of even our high water range let alone a 2% and below level often experienced by the citizenry over the previous decade.
A Broader Perspective
The above chart is the same measure as our first chart but we are broadening out the time horizon to get historical perspective of our current price inflation experience via this “core” price inflation measure.
Our red horizontal line walks us back circa mid-1993 to note a time when we have experienced this level of core rate price inflation. Rounding that to 30 years we still remain at a multi-decade high level of price inflation. Soft landing/goldilocks?
There remains a wealth of progress yet to be made on the price inflation front via the data, not opinion.
Consumer is Resilient or striving to keep up?
We are leaning into belaboring the topic as shared in the above chart as this measure has populated several recent editions. We share this again because if we are talking collective consumer then we have to go to collective Retail Sales.
As shared in previous editions when in a price inflation era it is important to keep in mind that a key driver of increased spending is the price inflation itself. We clear through that noise by adjusting collective sales by the price inflation rate. This gives us what is known as Inflation Adjusted Retail Sales results.
Retail Sales and consumer price measures were both updated last week so we have fresh updates for both and hence a fresh view of our current Inflation Adjusted Sales.
In the above chart we display the results in a broadened view. The chart dates back to 1993 for a multi-decade view which matches the timeline depicted in our second price inflation chart previously discussed.
In the view directly above we have placed circles around periods that were outside the normal experience which includes our current era to the far right. In the previous encircled time frames all three led to or were identifying recession.
Our current period has been posting negative adjusted sales since March of 2022 – two-plus years but we have not officially recessed economically.
Our current era sticks out like a sore thumb just as the other encircled time frames had done which offers anything but a thriving or even resilient consumer. When viewing the multi-decade chart in its wholeness it visually places into perspective the state of the current collective consumer.
The above charts in total do not depict goldilocks, soft landing, resilient/thriving consumer or an end of price inflation. Relative to the consumer they depict a collective consumer that is striving to keep up rather than a consumer that is thriving.
Relative to price inflation we see continued progress but said progress remains begrudgingly so. Importantly, progress does not equal end result. We have not attained economic nirvana (i.e. soft landing/goldilocks) but there is overall progress relative to price inflation.
We continue to question, using history as our guide, whether this price inflation era can be ended without a recession.
The Fed is expected to cut rates in September. This will not mean the price inflation issue has been overcome and may more accurately reflect a concern that we are heading into recession price inflation be damned.
That is a description that leans toward - the dreaded economic word – stagflation. Stagflation is polar opposite of the soft landing/goldilocks backdrop.
For now, per the data, price inflation remains an issue and the collective consumer continues to strive to keep up with said inflation. Offering we have attained soft landing status is just more narrative unsupported by the data.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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