OUTLOOK: The US is seeing an increasingly two-speed economy, and inflationary dichotomy. Manufacturing and goods demand is recessionary, pulling down headline and producer price inflation, and warning of a coming growth slowdown. Whilst peaked but still-strong Services and the jobs market dominate the economy and are keeping core inflation in a stubborn 5% range. But our broad inflation tracker clearly shows easing underlying price pressures. Which the coming growth slowdown will further dampen, and open door to interest rate cuts. Lower prices are also starting to return some consumer purchasing power and be a relief to corporate profit margins. A long-duration and tech focused stock market will also continue to reward this.
TRACKER: 13 of our 15 inflation measures are improving. From supply chains to manufacturing prices and commodities. But also the sticky rents, job openings, and services prices that most concern the Fed. The only two measures higher last month were consumer price expectations and housing activity. The median indicator was down 3% vs prior and 34% from peak levels. We track 6 segments: labour (employment ISM, JOLTS), housing (Zillow rent, NAHB index), goods (Used cars, Manufacturing ISM prices), commodities (Gasoline, broad commodities), supply chains (chain index, container rates), and price expectations (Michigan survey, Break-evens).
GAP: The Atlanta Fed divides constituents of inflation into two. Goods-heavy ‘flexible’ prices, from fuel to cars and clothing, that are most responsive to the economy, and 30% of inflation. These have collapsed as supply chains normalized and a pandemic goods demand hangover set in. The other 70% are services-heavy ‘sticky’ prices, like rent, utilities, education, and medical care. These sticky prices, alongside wage growth (also from Atlanta Fed) have peaked and are now inching lower as labour markets soften under lagged impact of 5% interest rates.
All data, figures & charts are valid as of 12/06/2023