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The Damage of On-Going Price Inflation is Revealing Itself

CAMS Weekly View from the Corner – Week ending 2/17/2023

February 20, 2023

“So, for the third sector, we don’t see anything here. So I think it would be premature—it would be very premature to declare victory or to think that we’ve really got this. There are many, many factors driving inflation in that sector, and they should be coming into play to have inflation—the disinflationary process begin in that sector. But, so far, we don’t see that. And I think until we do, we see ourselves as having a lot of work left to do.”

Jerome Powell Q&A Session Post FOMC Interest Rate Meeting February 1, 2023 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230201.pdf

We ended our previous edition offering an important update on the price inflation backdrop was coming in the form of the Consumer Price Index (CPI) and all of its sub-components. As an overall statement the price inflation measures came in at or stronger than expected. This means there were no downside surprises which when discussing price inflation would equate to not a whole lot of good news to digest.

As an important backdrop the Federal Reserve via Chairman Powell has offered ad nauseam they have a 2% inflation target and seemingly, per their consistent messaging, will not relent off that long held policy target.

With this, simply stated and regardless of the price inflation measure under review, we remain miles north of that target. Think, if you believe in the Fed’s resolve, the Fed will not be cutting interest rates (known as the Fed Pivot) anytime on the near horizon and in fact more rate hikes at this juncture can be expected.

Speaking to our header quote from Chairman Powell’s Q&A session in the most recent post-FOMC interest rate setting meeting the Services sector (identified as “the third sector” within the header quote) has been an on-going focus of the Chairman nearly every time he speaks.

His focus on this area exists because of the steadfastness of the price inflation issue within that broad sector. Via the updated CPI numbers let’s peek into that broad sector.

Above is a multi-decade chart of the CPI-Services sector. Per our two red highlighting arrows we see that we remain on trend upward as well as remain at multi-decade high levels. Per the above the year-over-year growth rate stands at 7.6% with the most recent update. This is the highest level we have seen during this long running price inflation trend. Yes, that means a new high in Services pricing.

Per the Chairman’s focus on this sector, the above offers no good news on the price inflation front. In light of this, per our header quote, there remains a lot of work yet to do in this price inflation fight to paraphrase the Chairman.

Meanwhile Back at the Everyday Household

As also shared in our previous edition while discussing the lack of Productivity growth and all the negatives associated with such we addressed some historical as well as current era issues on the wage growth front.

Specifically, when factoring in price inflation – what is known as Real Wage’s – we have seen the everyday household evermore challenged with their wages being unable to keep up with price inflation. This fact is now a long-standing negative trend and it is leaving its mark.

The above chart represents Average Hourly Earnings of All Employees minus the rate of price inflation via the CPI. Per our red circle to the right we see the lengthy and on-going negative real wage growth rates with no let up in sight. For reference our red arrow walks us back to the Great Recession (think market meltdown/housing bust) of 2008/09.

During that time while real wage growth rates went negative they did not go as low as our current era nor did they last nearly as long. Our current storyline in terms of time duration is double that of back then with forward reality offering more of this to come as near-term months unfold.

Households Pull the Rip Cord

Above we look at the growth rate of Revolving Credit, i.e. credit cards. The chart dates back just prior to the Great Recession in-keeping with our second chart above on Real Wage’s.

Our red down arrow highlights the precipitous fall into deep negative territory as free money was being bandied about in 2020/21 which played a notable role in letting price inflation out of bottle. With said free money (courtesy of the printing press and debt) households actually paid down credit cards which resulted in negative growth rates.

Then as price inflation set in rapidly and wage growth rates went negative rapidly credit card growth rates rose very rapidly. With this our current collective credit card growth rate is more than double that of the price inflation growth rate via the CPI measure.

All told households have pulled the rip cord in meeting household obligations with credit card “assistance.”

Leaves Little Room for Future Planning

While households are left with managing the challenging price inflation landscape the storyline leaves little room for future planning and of meeting unexpected financial challenges. This boils down to what is known as the Savings Rate.

Above is a very long-term perspective of the Savings Rate dating back to the 1950’s for a broad perspective. As we see with our red arrow highlighting the timeline we are currently nearly plumbing lows we have not seen before across the entire spectrum of time shared within the chart.

Similar to the previous chart on credit cards we also seen a tremendous increase in the Savings Rate when the free money was fanned about. Then as price inflation came onto the scene in a big way the Savings Rate went hard south and remains so with the most recent update.

Price inflation is Doing What Price Inflation Does

Price inflation throughout history destroys society with a particular focus on the middle, lower-middle and poor classes. This represents a large percentage of society and makes people especially vulnerable to negative wage growth rates and all the downstream issues (as briefly walked through in this edition) that unfold as logical follow-on’s when price inflation erodes the purchasing power of household incomes.

The most recent update in the overall price inflation storyline offered little to celebrate and highlights the fact (if the Chairman’s resolve can be believed) that the Fed has more work to do and the Fed Pivot may be much further off than collective market participants want to believe.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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