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"The Narrative" Continues to Bump up Against Reality

CAMS Weekly View from the Corner - Week ending 2/16/24

February 19, 2024

Strewn throughout numerous editions we have shared what we call “The Narrative” which is meant to succinctly describe the consensus belief of the previous X months if not recent couple of years that price inflation as an issue is over, the Fed will be able to cut interest rates consistently for seemingly as far as the eye can see and with this the economy will not miss a beat in its expected continual growth trajectory.


As an add-on to this the expected bottom line result will be that everyday households will experience ever growing wages when adjusted for price inflation which will lift all classes to new economic heights.  This describes socioeconomic nirvana, or to be more accurate to the consensus language, socioeconomic goldilocks – just perfect.


The above is the basic gist as we try to reduce a wealth of consensus talking points down to something manageable.


The problem with this is reality keeps inserting itself whereby it offers price inflation is not dead, wages are growing and working on turning up even higher (Powell and crew will not like that storyline if it develops further) but when adjusted for price inflation they are barely positive all while interest rate traders have nixed the expected March rate cut and now have begun to nix the May expected rate cut.


The March cut was a consensus guaranteed foregone conclusion just a couple of months ago but is no more.  The May cut was a guaranteed certainty via consensus even as recent as a couple of weeks ago but currently is working on being vaporized in terms of updated expectations via the CME’s Fed Funds futures pricing data, a.k.a. interest rate traders.


They Call it Sticky for a Reason


Price inflation, once it takes hold becomes sticky; it becomes stuck if not stubborn in its refusal to conveniently just go away, in particular to leave the scene without leaving a trail of economic damage behind it.  On this front we continue to ask the question, using history as our guide, will we really be able to put this price inflation era to bed without experiencing damage to the overall economy?


To be clear, there has been plenty of damage experienced within the everyday household in this price inflation era but will we be able to escape damage to the economy as a whole?  Frankly, again using history, this seems to be a very tall order.  Time will continue to inform on this front.

Last Tuesday we received a fresh update on the consumer price landscape to include the well recognized Consumer Price Index – CPI.  For months now it has been fair to say price growth rates continue to come down but remain well above the Fed’s 2% target.  Frankly, that line is often offered – which includes us btw – may be past its expiration date if you will.


Above is the CPI reflecting its growth in prices year-over-year.  We shared this same chart a month ago highlighting the obvious – CPI was not moving lower.  The problem with the most recent update is the same issue – CPI is not moving lower.


Our red circle depicts how sticky this price behavior has become.  Can you believe the low point within the circle dates back to June of 2023!?


Back in June – that was nearly three seasons ago now – it was a foregone conclusion, via consensus, that price inflation would just evaporate month after near-term month and would be a moot point given X months.  It has not happened.


In addition, our red horizontal arrow line highlights the fact that our current stubborn rate of price inflation remains the highest we have seen in the 10 years depicted in the chart.  Does that read like price inflation is dead, done and over?


The Core is Worse


If you hear “core” when price inflation is brought up simply know it means some price areas of society were extracted out of the discussion in order to look at areas considered to be less volatile. The above is overall CPI which includes food and energy.  Both can be volatile so “Core CPI” is often referenced in an attempt to take out those two volatile areas in order to get a better sense of what is actually occurring in the underlying pricing environment.


While the above CPI came in at a 3.1% growth rate the Core CPI came in at 3.9%.  For its part Core CPI has tried moving lower in recent months but is stalling in its descending trajectory.  Four months ago this measure came in at 4.0% to place the current 3.9% growth rate into recent perspective.


Wages are Attempting to Accelerate Upwards Again


Powell and crew have offered repetitively their concern that escalating wages could feed on themselves resulting in wage growth rates chasing price growth rates tit for tat.  This is known as wage push price inflation.  This increases the odds of an upward price inflation spiral if it continues as a trend over time, hence the concern.


The solution is to, well there are numerous solutions which entail too much for this edition but the bottom line is to get price inflation down so such a “chase” is not only unnecessary but is not even considered an issue in the socioeconomic landscape.


This, yet again, takes us to our favorite question of late:  Why are we talking about interest rate cuts!?

Above is a 10 year chart of Average Hourly Earnings for Production & Nonsupervisory Employees.  Toward the right on the chart we can see the downtrend in wage growth rates depicted by our red downtrend line.  For Powell’s part he has made note of this on numerous occasions.


Our red circle points to an attempt to curl upwards.  We emphasize this is an attempt.  We are not offering with certainty this is a new upward trending storyline but rather are paying attention to it in light of the Fed’s consistent messaging around it.


What we do feel confident about is this certainly has caught the Fed’s attention as well and if continues it will add another layer of pause on interest rate cuts.


Sadly, even with the above wage growth rate backdrop wage growth is barely positive when adjusted for price inflation.  This is on the heels of two year’s worth of price inflation adjusted wage growth rates being solidly negative.


A few months of barely positive inflation adjusted wage growth will not fix the aforementioned damage incurred at the everyday household level within this price inflation era.  Why are we talking about rate cuts – sorry – on a personal note I just can’t get this question out of my head.  Do we want to pressure the everyday household even more?  Nonsensical.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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