It will probably be hard to believe for those scarred by the post-pandemic inflation scare that believe inflation isn’t declining, but there was no inflation increase in May for both wholesale (PPI) and retail (CPI) inflation indexes.
Yes, for the first time in two years the Consumer Prices Index was unchanged, a zero-point inflation rise. Wholesale inflation, the Producer Price Index out the next day was unchanged for the first time in one year.
What does that tell us? Firstly, gas prices and housing (rents) have been declining of late after an initial uptick in the first quarter due to various shortages. Consumers are also becoming more cautious when they shop with major retailers like Target, Walmart, and grocery chains that are beginning to discount their products as shoppers look for bargains.
It will cause bonds in particular to rally because interest rates, including mortgages, finally begin to decline from their two-year highs.
U.S. wholesale (PPI) prices fell in May for the second time in three months — thanks partly to lower gas prices — in perhaps another sign an upturn in inflation earlier this year is fading. The producer price index actually fell 0.2% last month, the government said Thursday.
The retail and wholesale graphs illustrate the sudden drop in inflation, and the fact that the Q1 shortages were temporary. So, now it’s largely leisure activities—e.g., dining out, travel—in the service sector of the American economy, and housing rents that have kept consumers spending and the overall inflation rates higher.
This all fits in neatly with why the Fed believes it must keep interest rates high enough to slow down consumer spending even more, so that borrowing costs, for instance, remain intolerably high (i.e., with 8.5% Prime Rate). And that’s probably why last month’s retail sales were flat.
The cost of goods dropped 0.8 percent largely because of falling gas prices. Food prices also declined. The cost of services, the biggest driver of inflation, was unchanged in May after a big increase in the prior month.
The gradual slowdown in activity is obviously working. Weekly initial claims for unemployment insurance have been rising, signaling a slowdown in hiring. Initial jobless claims rose 13,000 — to 242,000 — in the week ending June 8, the Labor Department said also on Thursday. That’s the highest level of claims since last August.
What’s keeping the Fed from cutting rates is that wages are still climbing 4.1 percent and Fed officials believe, for some reason, that the unemployment rate should rise above 4 percent—i.e., more employees must lose their jobs for inflation to decline further.
Housing rents, the main ingredient of retail CPI inflation, won’t come down until more housing is built. But that can’t happen until lower interest rates stimulate both the construction and sales of more homes!
That’s playing brinkmanship, in my opinion. It’s not taking into account the possibility of a major geopolitical surprise spooking financial markets, or consumers who are no longer flush with savings from the pandemic aid.
It could be China invading Taiwan, for instance? One can also imagine what might happen if North Korea accidentally sets off a nuclear confrontation. The Russian Navy is now also making regular visits to Cuba, and President Kennedy’s Russian missile crisis is not a very distant memory.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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