CAMS Weekly View from the Corner – Week ending 4/14/2023
April 17, 2023
Inflation: Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency www.dictionary.com “Have you seen how high prices are rising?” “In light of the increase in prices I have had to cut back on some of my purchases.” “I cannot keep up with price increases – it feels like a race I cannot win.”
The above represent consistent sentiments expressed in passing over the previous two and a half years of which most of us have heard, shared and perhaps expressed. The gist of the shared views in general discussion always focuses on how prices are rising. This is the general view of price inflation – prices are rising. Under this view the focus is on those prices – those pesky prices which many times gets boiled down to X provider of goods/services being pointed to as the problem. “If these price gougers would just stop already…..” Accurately speaking it is about the currency becoming worth less and less in its purchasing power. Purchasing power is supposed to be a central tenet of currency being it is a medium of exchange. With this its purchasing power is its essence which is also known as its “store of value” component. The store of value part of a paper currency has become notably laughable over time as its purchasing power consistently reduces. If you are a consistent reader of these editions you will recognize the continual referencing as well as quoting of the Federal Reserve’s Chairman and how they remain steadfast on their 2% inflation target. As we stand here today the 2% inflation level remains far south of our current experience which underlines the Fed has a long way to go in achieving said target. What gets lost in this is even with such a target (which has been a long-standing policy of the Federal Reserve) we can accurately state that the Fed is letting us all know the purchasing power, by design, is targeted to be reduced by 2% per year. Said more to the point the currency will become worth less and less and it is baked in the cake. Hence, the store of value component – i.e. its purchasing power – is in name only. The Currency Continues to Become Worth Less With the above in mind this past week we seen price inflation data updated whereby it informed the citizenry that our currency is continuing to become worth less in its purchasing power. Flipped over, the more recognized – prices continue to rise. As of last week’s price inflation updates the well recognized Consumer Price Index (CPI) and all its sub-components reflected different degrees of the on-going price inflation issue. While the CPI has reduced in trend from a peak of 9% to current 5% the deeper story has changed very little. The significance of the overall CPI is it is prone to a more volatile storyline (think up and down quicker) in light of various components that are more heavily weighted in the CPI construction while these inputs are themselves more volatile in their pricing history. Food and energy are two broad components that speak to this and can mask or accentuate what may be taking place within the large overall societal inflation backdrop. As an aside, interestingly, when this more volatile CPI is trending in a more favorable direction it is pointed to as the representative measure for price inflation. When it trends in a less favorable direction its volatile nature is pointed out and is discredited as a representative price inflation measure. Interesting.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=12ybm
While the CPI is telling a price inflation story that is on the downtrend (and yet far above the 2% inflation target) above we see a significant measure within the CPI calculation as well an important measure to the citizenry’s everyday living that is not budging off its established uptrend. Above is the Owners’ Equivalent Rent measure which is the primary measure used within CPI to recognize housing costs for the citizenry. The above chart dates back to the early 1980’s. Our red horizontal arrow highlights that we have never seen these levels of price inflation for this housing cost measure in the timeframe depicted. Our red vertical line highlights the relentless uptrend (where’s the downtrend?) in this significant societal component of price inflation.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=12ybv
All know Services play a large role within our economy and in the everyday household’s financial budget. This is why, in the previous several months in particular, Fed Chairman Powell has spoken specifically to this area of price inflation on a consistent basis. He has stated this area has been sticky if not relentless and is a focus of the Fed’s policy making board. In the above chart for CPI-Services our red horizontal line highlights this significant price inflation area continues to post levels dating back to the early 1980’s. Our red vertical line highlights the relentless uptrend. To place a fine point on this trend’s storyline its high mark was in January of this year at 7.63% with our current reading posting 7.24%. Progress?
Click For Larger View: https://fred.stlouisfed.org/graph/?g=12yaf
Our last view is the above Median CPI measure produced by the Cleveland Federal Reserve bank. This is a well recognized measure of price inflation within the analytical community and generally unknown to the masses. We can look at this measure as the antithesis of the well known CPI in that the CPI, as shared, is more volatile and impacted by weighted measures that are volatile. Median CPI is meant to go deep inside the price inflation backdrop (keeping it simple here) similar to a diagnostics test for a car or an MRI for our bodies. Yet again, per our red horizontal line we see we have not seen these levels of Median CPI dating back to the early 1980’s and in this case have not seen anything close to these levels dating back to its inception. Our red vertical line highlights the relentless uptrend and leaves us asking again – where’s the downtrend? What We Have Never Experienced While we have shared this in various editions it is worth underlining that we have never had a notable price inflation experience without it leading to a recession. The economy is certainly slowing and per the above, price inflation is remaining stout. Got stagflation? As we stand we are not in recession but more and more indicators are pointing that is seems to be coming. It is important to keep in mind historically companies produce less sales and profits in recessions and that is something collective market participants focus on. This is why incoming recessions are historically rough times for stock prices as said participants discount their expected reduction in sales and profits when they think they see an incoming recession. Per stock market pricing we appear not to be there yet relative to collective participant’s view of the near-term economic outlook. That can change – they are fluid in their assessments. Interestingly, in light of this steadfast price inflation backdrop the Fed may not be able to respond to the recession winds as they have historically with aggressive interest rate reductions and money printing. If they do they raise the risk of resurgent price inflation while many measures of price inflation have not even halted their uptrend’s in any significant manner. The real question is how deep of a recession will it take to reset this price inflation issue to the Fed’s stated 2% target? All through it – whether it’s 9%, 5% or 2% price inflation – know through it all our money becomes consistently worth less and that is the true messaging of price inflation. I wish you well…
Director, Market Research & Portfolio Analysis
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.
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