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A Sticky Trend

CAMS Weekly View from the Corner - Week ending 9/15/23

September 18, 2023

A couple of months ago we offered an edition that questioned what we referred to as “The Narrative.” We used that to succinctly describe a consensus belief among market/econ observers that price inflation was dead and is a non-issue going forward. This narrative has been dominant for numerous months if not well over a year.

In that edition we drilled down to and focused on a key input for the economy at large that quietly had begun to change its character in terms of its previously experienced dormant trend or lack of trend. Per its pricing it had begun to trend upward again.

In this edition we will use the exact chart shared in that edition in order to underline how the pricing trend has unfolded over the following couple of months.

The key economic input in question is the price of oil. Above is a pricing chart for oil over the previous twelve months.

This is the chart we shared in our previous edition addressing the topic. Note the blue arrow that we used to highlight the trend change at that time. With that as a reference point we can see oil’s continued trend behavior since that time.

Note the short lived downturn attempt after our blue line highlight of the uptrend.

This is customary in a strong new trend which is referred to as a test of the trend. The significance of this particular test was its inability to attempt to go back and test the red sloping line which is the 200 day moving average price. This is simply the average price of the previous 200 days.

As we shared in our edition back then while using the above chart the fact that oil’s price was able to come off its bottom as it did and then easily launch up through its 200 day moving average (as though it was not even there) was very significant in chart analysis and added credibility to the trend change.

The fact that this price had been sub-200 day for many months also offered and underlined its behavioral pricing change when it went up through it so easily.

At the time of our above blue arrow annotation the oil price had been up 20% off its bottom which occurred in a short time. Current day we see oil is up 32% off its bottom which encapsulates a full two months of time. A significant rise in a short time – are we sure price inflation is a non-issue?

He Offered it is a Sticky Trend

Chairman Powell of the Federal Reserve has offered numerous times over the previous near-two years now in post interest rate setting policy meeting Q&A’s that Services price inflation is a real concern in particular because it can and has become “sticky” in its trend characteristics.

Adding to this concern is that in the U.S. economy Services represent a significant percentage of daily economic life.

Whether Powell and friends are changing their tune relative to the importance of this area of the price inflation story we cannot be certain but what is certain is Services price inflation has barely let up from its high point all the way through this price inflation era.

Above is a measure of Services price inflation dating back to year 2000. Our red horizontal line depicts the previous high water mark for this important area of the economy and as we can see has been easily taken out to the upside over two years ago.

Our red circle highlights the previous year or so. Speaking to its stickiness and its refusal to go away the first low level within the circle is July of 2022 which at that time registered at 4.7%. To the right of that the second low point within the circle is July of 2023 where it measured 4.8%. Progress?

The high mark within the circle measured 5.7% with our most recent reading registering 5.2%. Through it all we have not seen any type of downtrend established and we are a mere ½% off the previous high point. This while the aforementioned “narrative” offers price inflation is a non-issue.

Anecdotally adding to this, on a personal note, I have experienced in recent weeks services price inflation that dwarfs the above figures. In three instances service providers offered their renewal pricing for the oncoming 12 months. Every one of them was high single digit to double digit increases.

One in particular, within a verbal discussion shared the forward pricing and with some quick math in my mind I retorted “That is a 16% increase while the government price inflation measure tells me inflation is only in the 3-4% area?” What gives?

He offered not only is the government wrong but continued price increases after this are nearly baked in the cake of which he went on to explain. Importantly, these service offerings are not esoteric but rather normal services incurred by nearly any everyday household/business owner.

What was my kneejerk response dear reader? What we all do right – “How can I lower this to a more reasonable rate?”

The bottom line conclusion – of which we all have experienced if not grown accustomed to - enter good ole shrinkflation. I chose to reduce the level of service while still paying more albeit less than the 16% offered increase.

This is always a storyline in price inflation eras. The citizenry do whatever they can to adjust, evade, manage the price inflation backdrop and through it all standards of living always go down as the purchasing power of their currency become worth-less. The bottom line of it all is we get less (product/service) for more money. Less for more.

Sadly, per the data, price inflation is not dead.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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