Water Seeks Its Own Level

“Life in us is like water in a river.” ~ Henry David Thoreau

Question: What are your thoughts on the September Producer and Consumer Price Index numbers?

Answer: These two reports measure inflation with both coming in higher than expected which was not a complete surprise. Rising price increases tend to lag current reality making it difficult to pinpoint exactly when inflation statistic reports will reflect any easing inflation which should materialize later this year and early in 2023. The inflation reports did test the patience of investors as experienced in financial market volatility.

In the aftermath of Hurricane Ian, it was apparent that external forces influenced water. The similarities between tumultuous, turbulent, and chaotic weather and the economic activity are evident. Here are five areas to watch as we analyze inflation:

1. Commodities Many commodity prices rose when Russia invaded Ukraine. Since the initial invasion, commodity prices, more specifically energy prices, have eased as global growth slowdown concerns have increased. The decline in oil (28%) and gasoline (22%) prices gave consumers relief slowing inflation from its June peak. There is concern for the upcoming winter, as higher utility bills are likely.

2. Goods Supply chain disruptions from COVID contributed to empty shelves and higher prices. As we’ve reopened the economy, many retailers overordered and have excess inventory as consumers shifted away from purchasing additional goods.

For example, one year ago, the number of ships backed up at the ports off the coast of California was over 100. Today, there are only six indicating that goods are moving getting to the consumer without a need to overstock. Retailers are kicking off the holiday shopping season even earlier. Amazon hosted its second Prime Day earlier this month, and the early results were rather lackluster especially when compared to their July event. Consumers are more price conscious leaving retailers holding excess inventories. This will likely lead to more discounting to promote spending. This bodes well for consumer and reduced ‘goods’ inflation in the months ahead.

3. Services Travelers eager to book trips are facing higher price and adjusting their behavior accordingly. In many instances trips are being cancelled due to higher costs. Holiday related travel is expected to remain strong yet the uptick in airfare, hotel accommodations and restaurants could reduce demand and spending levels. This could lead to price declines in these areas.

4. Food Despite the CPI’s food inflation numbers remaining stubbornly high, there is some good news in that the UN Food Price Index has declined for six consecutive months. There have been price improvements for beef, chicken, oils, and milk, but headlines surrounding droughts and continued fallout from the war have kept others elevated. A reprieve may come from the United Nations willingness to consider fast-tracking inspections for Ukraine’s grain shipments. American farmers are thoughtfully adjusting or substituting crop choices to benefit from supply constraints. As a result, supply and demand should begin to normalize, and at a minimum, slow the pace of food price increases and favorably impact grocery bills and restaurant costs into the fourth quarter of and early part of 2023.

5. Rents CPI’s Owner Equivalent Rent growth report posted its largest monthly increase since August 1990. However, given that rent prices typically lag the move in housing prices by approximately one year, the recent housing market weakness may lead to more reasonable rents by mid-2023. Already, real-time Redfin data shows the year-over-year pace of rent growth halving (9% in September vs 18% in March). What is the disconnect? The CPI survey asks homeowners how much they believe they can rent their home for (personally something most of us do not keep accurate tabs on!) versus Redfin’s actual current asking price for rentals.

Bottom Line

Inflation is likely to decelerate, but it will be a multi-stage process. On a positive note, the next two months are likely to see the year-over-year pace decline. The headline CPI index will ‘roll-off’ the two hot monthly inflation prints seen in October (+0.9%) and November (+0.7%) of last year. Hopefully, that will be the start to a consistent downward trend in inflationary pressures. As always, the cure for higher prices is higher prices. Stay focused and plan accordingly.

Source: FactSet, data as of 10/15/2022.

The opinions expressed are those of the writer as of October 16, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time based on market conditions and other factors. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investing involves risk and the possible loss of principal invested, investors may incur a profit or a loss. There is no guarantee any particular investment strategy will be successful. Past performance is no guarantee of future results. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.