InflationAnother month, another extremely high inflation rate. The CPI came in today for the month of June at 9.1% which topped the estimate of 8.8% and was the highest level since November 1981. Energy inflation was top of mind yet again as gasoline prices climbed close to 60% compared to one year ago, electricity prices grew 13.7% over the same time frame, and natural gas was up 38.4%. Food prices also remained hot as they rose 10.4% over the last 12 months and the shelter index was up 5.6%...
Inflation
Another month, another extremely high inflation rate. The CPI came in today for the month of June at 9.1% which topped the estimate of 8.8% and was the highest level since November 1981. Energy inflation was top of mind yet again as gasoline prices climbed close to 60% compared to one year ago, electricity prices grew 13.7% over the same time frame, and natural gas was up 38.4%. Food prices also remained hot as they rose 10.4% over the last 12 months and the shelter index was up 5.6% which was the highest level since February 1991. One area that is seeing a "reprieve" from what I believe is more difficult comparisons is car prices. The cost for new vehicles was up 11.4% compared to last year and the used car & truck index was up 7.1% during the same time frame. Remember recently this was around 30%! With that said I still believe inflation will be lighter as we exit the year, but all lighter means is not as high! We have started to see some reduction in commodity prices which could help with input costs for companies and could slow the CPI in the months ahead. Remember it takes time for these various costs to work through supply chains and the overall economy.
Producer Price Index (PPI)
After yesterday's CPI report, the Producer Price Index (PPI) remained around historic levels. In the month of June, Headline PPI was up 1.1% compared to the month of May and increased 11.3% compared to last year (Recent all-time high was 11.6% in March). Of the month over month gain almost 90% came from a 10% increase in final demand energy. One positive note was the core PPI which excludes energy, as well as food and trade service prices was up 6.4% compared to last year. This was a deceleration from May's 6.8% gain and off the 7.1% gain we saw in March. Unfortunately, with these elevated prices, the higher costs will likely continue to be passed on to the end consumer.
Recession
There may be a recession coming but it will be the best recession we may have seen in our lifetime. There's not enough room in this post to list all the reasons so I will have to summarize some of the facts briefly. Inventory levels at many companies are low. Profit margins at companies are high around 18%. For reference, profit margins heading into recessions in 1991 and 2001 fell to single digits. Businesses are sitting on a record $4 trillion in cash. Households still have $18.5 trillion in checking accounts, savings accounts, and money market mutual funds which is about $5 trillion higher than before the pandemic. The job market is still very strong and in the 12 recessions since World War II that has never been the case. And I forgot to mention in the second quarter many commodities like soybeans, wheat and corn have dropped double digits. You may hear the media and other worry warts screaming the sky is falling like chicken little. But I believe this will not even feel like a recession. Let’s see where we stand December 31, 2022. In the meantime, I’ll be keeping my eye on the important data not the media hype!
Housing Market
Historically, slowdowns in new home construction have been a leading indicator for past recessions. In the month of May we saw new home construction drop 14% from a month earlier, but before you hit the panic button it's important to look at the lessons home builders learned from the housing crisis in 2007. During that time frame they drastically overbuilt, which does not appear to be the case this time around. In fact, in the first quarter, total US spending on home building was 22% below the pace of building at the peak of the early 2000s. I believe we have an expensive housing market set for a pullback, but by no means do I believe we have a housing crisis that led to the Great Recession in 2008 and 2009.
Mortgage Rates
People have been worrying about the increase in mortgage rates, but historically they are not out of control by any means. In fact, if you go back to 1971 the long-term average for 30-year mortgage rates is just under 8% and the record high that came about in 1981 was 16.64%! At around 6% I'd say we now have a more normalized interest rate environment and the days of getting under a 3% mortgage are in the past.
Business Ethics
I’m glad to see in what we may call these crazy times that ethics are still important. The Securities Exchange Commission (SEC) fined the accounting firm Ernst and Young $100 million for cheating on ethics exams. It is so important to keep the integrity of our businesses and our young graduates coming out from higher education good ethics result in a good long-term career.
Job Retention
As the economy slows down job retention should be on more employees' minds. A couple of things to think about. First if you switch jobs and you’re the new hire at the company and there’s a layoff you’ll probably be the first one to go. Make sure your face is seen at the office, working remotely makes you less memorable and produces less of a connection with the employer which makes it much easier to put you on the list to go first. Make sure you’re doing extra training to be more valuable to your employer and also show up to work a little early and don’t leave right at 5 o’clock. Show your boss you care. If layoffs at your firm come around in the next 6 to 12 months, you want to make sure that you’re known as a hard worker and that you're dependable.
Employers
We have been continually talking about the strong job market and how it will soften a recession. The average increase in base pay in the US so far in 2022 is 4.8%. This is what employers are coming up with to retain their employees. This is not like the past 12 recessions since World War II where employers were trying to reduce their employees pay to save money. About a third of employers are considering or planning midyear raises and many employers are giving percentage bonuses in the month of July. This is great news for consumers and the economy. The downside is inflation is eating into these gains.
Retail Sales
Retail sales came out today and I'd say it was an alright report. June retail sales were up 1% compared to May and compared to June 2021 they grew 8.4%. While that is a nice growth rate, it is important to remember inflation was 9.1% in the month which means the sales did not likely produce a real growth rate when accounting for inflation. Categories that drove the sales included gas stations which were up 49.1%, grocery stores up 8.3%, and food services and drinking places up 13.4%. Areas that were weak included electronics and appliance stores which were down 9.1%, department stores were down 2.9%, and auto & other motor vehicle dealers were down 1.1%. With the numbers now in for the full quarter I still believe it's possible GDP contracted again in Q2 as consumer spending was not able to keep up with inflation.
Food Prices
I don’t know about you, but I really like corn on the cob with a nice coating of butter. Unfortunately, corn is one of the food categories because of the Russia and Ukraine war that has shot up 27% since January. On the other side of the coin rice has fallen 17% since January so maybe I will have to switch over to fried rice. However, health wise that is probably not the healthiest decision.
Harrison Johnson, CFP®: "Tax-loss Harvesting"
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