The markets received a bonanza of economic data on Wednesday, the 10th. The figures were, for the most part, benign and unsurprising. The major indicators suggest that the Fed’s policy in increasing interest rates at the current pace is working without having devastating impact on the economy.
We wish to report and comment on the latest inflation figures. Numbers, however, are abstract and impersonal. Sometimes we are so obsessed with looking at data that we overlook how inflation affects real people with real families living real lives. Inflation accentuates socio-economic differences, and we wish to comment on the divisions it creates.
Inflation: Losing Some Air
The latest inflation data reflect past observations made in Fortis newsletters and communications to investors that inflation may have peaked in June and early July. The Consumer Price Index (CPI) for July increased 8.5% from a year ago, down from the 9.1% rate in June.
Core prices, which exclude food and energy, increased 0.3% in July following a 0.7% rise in June. The annual increase in Core inflation remained at 5.9%.
The energy index fell 4.6% in July, after rising 7.5% in June. On an annual basis the energy index increased 32.9% for the 12 months ending in July, a smaller increase than the 41.6% rise for the 12 months ending in June.
The Producer Price Index (PPI) for July was replete with positive news. The PPI fell 0.5% in July, down from a 1.0% jump in June. This is the first negative monthly decline since April 2020. Economists expected a 0.2% increase.
The core PPI, which excludes volatile food and energy prices, rose 0.2% in July, down from a 0.3% gain in June. Core prices are up 5.8% from a year earlier but down from 6.4% in June.
The cost of goods fell 1.8 % in July, the largest decline since the 2020 pandemic recession.
The Core Producer Price Index, which excludes volatile food and energy prices, rose 0.2% in July, down from a 0.3% gain in the prior month. Core prices are up 5.8% from a year earlier, down from 6.4% in June.
The PPI measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category. It is different from the Consumer Price Index (CPI), which measures change in the price of goods and services paid by consumers.
- As of July 26, the S&P is up 3.90% for the month, the largest increase since March.
- Approximately 75% of S&P earnings are better than expected.
- The Nasdaq is up almost 5% for July.
- The S&P 500 broad market index forward price-earnings multiple is
- Approximately 16.5 times this year’s projected earnings and 15 times next year’s earnings. These numbers are within the historical S&P range.
The Unit Labor Costs (ULC) report may be a harbinger of future difficulties. The ULC measures the costs related to producing each unit of output. Economists measure the ULC for two quarters at a time to show trends and avoid aberrations. According to the BLS, unit labor costs in the nonfarm business sector rose 10.8% in the second quarter, following a 12.7% jump in the first quarter. Output fell 4.6% for the two quarters. Last quarter was the second in a row in which output decreased; quarter 1 experienced a 7.4% fall in productivity.
Inflation: Every Silver Lining Has a Cloud
While the CPI and PPI number are better than expected, there are numerous sectors of our economy where inflation is not under control and prices continue to spiral, seemingly impervious to the traditional effects of higher interest rates.
- This can be perhaps most clearly seen in the prices for new cars, which reached an all-time high in June. While shortages of new cars has largely been caused by the scarcity of semiconductors and other computer parts, shortages have been a boon for automobile makers. The cost of a new vehicle increased 0.6% in July, 10.4% annually. The average new car sold for over $48,000; used cars just above $28,000.
It is possible that car makers may adopt a new paradigm. The paucity of new cars has allowed auto companies to raise their prices without restraint. It has not dampened sales; there are waiting lists at some agencies for the purchase of new cars. Since car makers are making greater profits than at any previous time, they may determine that it is in their self-interest to persist in making fewer cars with greater corporate profit.
- Airline ticket prices are skyrocketing. Inflation affects virtually all areas of air travel: cost of the aircraft, operations, wages, and fuel. Prices for flights have increased 25% over the past year, the largest jump since 1989. In April, airfares rose 18.6%.
- Grocery prices are continuing to soar. They rose 1.3% from June and are up 13.1% over the past 12 months. There are numerous causes for this increase, including Russia’s war in Ukraine. While disrupting the flow of wheat to world markets, fertilizer shipments are driving up the cost for commodities for farmers. Transportation costs, which may ameliorate in the future, were also a major factor in the increase.
- Breakfast cereal prices rose 2% from June and 16.4% from a year ago; chicken rose by 1.4% and 17.6% annually; eggs are up 38% from June and 4.3% compared to June of 2022; Nonalcoholic beverages increased 2.0% from June.
- Although energy remains one of the major causes of inflation, there is some good news. The price of gas has dropped for 52 straight days. The problem is that the average price per gallon is $4.04.
- Rents increased 0.4% in July and 6.3% over the past year. Rents in major cities have increased by as much as 50% over the last year. Landlords, who faced restrictions during Covid, seem to be making up for lost time.
- Eating out remains expensive. Restaurant tabs rose 0.7% from June to July, and 7.6% annually.
- Recent job figures imply a tight labor market. According to the latest employment report, 528,000 new jobs were added in July, twice as many as expected. Some economists, in fact, thought job growth would recede because of tighter monetary restraints.
The implications of the data are ambivalent. Job increases suggest a healthy, anti-recessionary economy. They also add greater upward pressure on wages, creating future threats of inflation. The average hourly earnings in June increased by 0.5%. The new data suggest that the Federal Reserve may have to act more aggressively in raising interest rates. An increase of 0.50% is probable in September.
University of Michigan Consumer Confidence Index rose to 51.5 in the July survey, up from 50 in June.
The University of Michigan Expectations Index rose to 58.1, up from 53.8 in June. According to the Director of the survey: “Robust consumer spending had been supported by strong labor markets and the expectation of growing incomes, but with persistently high prices eroding those incomes, consumers are adjusting their spending habits to cope.”
The Director also remarked that consumers are not currently worried about their own employment stability, although they expressed concern over future job opening. Unemployment expectations worsened by 14%, even though over half of the respondents expect their incomes to grow over the next year. Inflation was cited as the main factor for declining living standards over the past year by 49% of all households.
Inflation and Low-Income Workers: The Two Americas
There are obvious political and social divisions in America which are constantly reported by the media. There is another division in our society, however, which is less talked about but no less real: the gulf between the wealthy and lower-income families.
This separation becomes most obvious during inflationary periods. Inflation acerbates and accentuates the economic disparities between the wealthy and low-income earners. The wealthy have economic resources that allow them to live through inflation without significant changes in their lifestyles. At worst, higher prices are merely a pesky fly. Even at 9.1% inflation, they continue to dine in restaurants, take vacations, fly to resorts, rent hotel rooms, and buy cars. Easy Street is never under repair.
Lower income wage earners, however, feel the bite of inflation in fulfilling their basic needs. Inflation disproportionately affects them, as they spend a larger percentage of their incomes on necessities than the wealthy. Inflation directly affects their quality of life much more significantly than for higher earners. From the beer they drink to the groceries they buy, lower-income earners are buying less, switching to lower cost brands, and paying for goods with excessive use of credit cards. Trips to the doctors, appliance repairs, credit card payments may be delayed. They may be forced to negotiate with themselves: Should I cut back on food in order to buy medications? Should I skip a rent payment so that I can buy gas? Inflation becomes an unwanted “regressive consumption tax” for the neediest in society.
Approximately 60% of wage earners are living paycheck-to-paycheck. Even small increases in prices have strong, stinging effects. Unfortunately, sectors of the economy with persistently high inflation are hard to avoid: groceries, rents, and gas are eating up an especially high portion of their income.
Inflation, however, is more than simply paying more for groceries or gas. Its effects on low-income employees go beyond economics. The psychological costs, in fact, may be greater than the fiscal costs. Recent studies suggest that people having trouble making ends meet often suffer from insecurity, lack of self-confidence, emotional stress, irritability, and family pressures. Cognitive functions, such as memory, concentration, and patience are also balefully affected. Poor nutrition and sleep deprivation are also commonly experienced by people worried about a decline in the quality of their lives.
There are personal, humane reasons to curb inflation that are as important and significant as any offered by economists, investors, and the business community. I hope we shall keep in our thoughts the effects of fiscal numbers on real people. When inflation is low, everyone prospers.
We are in the midst of a summer rally that started in mid-June, sparked by a moderation in prices and inflation. A further indication of recent investor optimism is that the VIX or “fear index” has fallen below 20 for the first time since April. Prices are still 8.5% higher than a year ago, which is unacceptable, but there are data to suggest that the worst is behind us. Consumer expectations of inflation, for instance, over the longer term have fallen. Markets often reflect economic expectations six or nine months in the future. We continue to urge investors to remain patient, avoid emotional decisions, and look for strong companies with low valuations.
