CAMS View from the Corner
December 17, 2024
In our previous edition we shared our incoming recession obsession as a mental state which may be replacing our long held price inflation obsession of recent years.
Just a thought – what if they both meet up somewhere in the middle so-to-speak?
That is moving toward stagflation – a topic we have intermittently raised over recent years. This is when the economy goes weak coupled with price inflation refusing to leave the socioeconomic landscape. This is neither a prediction nor our baseline view but it is a perspective worth monitoring to keep us focused on its potential.
In our view we have been experiencing a touch of stagflation, in particular in the previous two years. Let’s call it stagflation-lite. We are not being cute with this rather offer it seriously relative to societal observations in conjunction with some of the economic data of recent years.
On a personal note I have long lost track of the numerous times I’ve heard in passing how challenged the economy is.
In fact, just the other day in having a general discussion with a person who heads up a service business he spontaneously offered - “We fully appreciate that people are generally challenged financially with the economy as it is.”
Say what – I immediately thought to myself. My instantaneous self-talk always offers, “There it is again.”
I have heard such matter-of-fact economic points of view buried within advertisements, general (non-economic) commentary and as offered, in passing in everyday life. Interestingly, I observe this far more from non-economic commentary than economic oriented offerings.
The non-economic commentary offers their experience of these economic times without specifically meaning to do so as they are sharing it as a contextual backdrop it seems. Meanwhile, the economic oriented offerings focus more on the data – human experience of the data often gets lost in the data driven focus.
What gives here?
We have not experienced any negative GDP growth that would support the experiential view offered from these various everyday observations and interactions.
What gives is it is not about whether we have had negative GDP enter the scene rather it is the long running experience of price inflation.
Given enough time, once it becomes entrenched in society, ever larger swaths of the citizenry find it more and more difficult to keep up with prices. Drill just one level under the surface and it is really about wage/income growth not keeping up with price growth.
As larger swaths of the citizenry find it ever more difficult to keep up with prices the logical follow-on of “forced” price inflation induced discretionary spending seeps into the societal landscape. This is not the normal discretionary spending we all experience such as – “That new car looks nice but not now” type of discretion.
Rather, it looks more like - we like and use X brands and X products but we will have to cut back on some of these expenditures.
It is not that those purchase desires are out of their economic league if you will but rather general prices are forcing their hand to make their income stretch in light of its growth underperforming relative to the growth rate in prices and with this price induced discretion kicks in.
“In-line” Does not equal “Price Inflation is conquered”
“In-line” seems to have become the new “price inflation is over.”
Heading into any economic release there is always a general consensus on what the result will be once released. If the result equals what is expected we call it “in-line” as in, in-line with the consensus expectations.
Interestingly, it seems in-line relative to price inflation releases has morphed into; the price inflation backdrop is fine because results came in as expected. The overriding problem with this is the vast majority of releases remain well above the Fed’s 2% target.
We are now on the cusp of entering 2025 and we still see price inflation results to have yet even touch 2% let alone move sub-2%. This was supposed to be behind us by now “per consensus” but it has yet to present itself.
Case in point is last Wednesday’s CPI release. The year-over-year growth in prices via CPI came in at 2.75%. For perspective the previous month’s release was 2.6% and the month before that 2.4%.
We offered along the path of our price inflation obsession that a touch n’ go scenario may unfold relative to price inflation in light of the Fed’s too quick to cut approach.
That is 2% or thereabouts may be attained but will it be a touch and then a go from there as in reestablishing its trend upward. 2.4% has quietly moved to 2.75% which is too early to call it a reestablishing trend but we certainly have yet to see a 2% or less touch.
Worse than this is what is known as the Core CPI result. This is CPI with Food and Energy removed because they tend to be more volatile areas and hence can mask what is actually occurring with price inflation under the surface within the economic landscape.
For its part Core CPI came in at 3.3% year-over-year growth as of last Wednesday’s release. For perspective dialing back months ago to the June release – yes June - it was 3.3%. Importantly Core CPI has remained steadfast at this level all through the summer and fall seasons and continues to do so as we point toward official winter.
Consensus was not expecting this but yet the numbers were “in-line” and hence treated in commentary and narratives as though price inflation is over. 3.3% in CPI universe is miles north of the Fed’s 2% target.
Price Inflation Adjusted Wage Growth Rates
The CPI results of recent months walks us back to our aforementioned forced discretion observation. The everyday household took a notable hit when adjusting wage growth rates by the growth in general prices in recent years.
For example, Average Hourly Earnings from the spring of 2021 through the spring of 2023 – two full years – posted wage growth rates that were negative when adjusted for price inflation growth rates. Two full years is a long time of putting continued pressure on households and hence increasing our “forced discretion” view on larger swaths of the citizenry.
Following this time period the previous year-plus has produced marginally positive inflation adjusted wage growth rates outside of a couple outlier months here and there. The consistent read has been sub 1% growth in wages when adjusted for inflation. This does not win the day for the everyday household in making up for recent years.
Adding this all up, from a full two years of negative wage rates and then more recently only marginally positive is a long stretch of everyday household financial stress
Enter forced discretion and hence our aforementioned, non-economic commentary type offerings that we are in challenging economic times as generally observed in happenstance interactions and observations.
Something’s Gotta Give
Either wage growth rates need to increase to begin to notably exceed price inflation (which can invite more price inflation via a wage growth inflation spiral unless tremendous Productivity growth rates coincide) or price inflation itself needs to be fully addressed.
Importantly, if your kneejerk reaction is energy and food need to be brought down to fix this issue recall above our largest issue is Core CPI – this excludes food and energy. The point is the economic system at large is still incurring above tolerable price inflation growth rates.
The Fed’s on-going rate cutting cycle is unlikely – and has proven so thus far – to solve the price inflation issue. We ask our long running question again, using history as our guide – will this price inflation issue remain until a recession plays a role in taking it out? History offers we will need a recession. Time will tell her story on this.
This all walks us back to where we began relative to our stagflation-lite observation.
Until we see price inflation fully addressed it may be a stretch to think the everyday citizen will experience the often referenced “good ole days,” which in this case takes us back to a consistent, sub 2% general price inflation landscape along with inflation adjusted wage growth rates that are notably and consistently positive.
It’s a Wrap!!
Well another year is quickly coming to a close. With this in mind this edition wraps up our 2024 offerings. We appreciate your readership and hope it serves you in some way. We wish you a Merry Christmas and a Happy New Year! We will see you in 2025!
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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