Deflation

TRANSITORY IS AS TRANSITORY DOES:

Bye bye inflation. We hardly knew you… (Zachary Karabell, Sep 20, 2024, The Edgy Optimist)

With the Federal Reserve at last reversing course and lowering short-term interest rates by 50bps this week, we can officially say that a chapter of US economic history has ended. Inflation – the economic monster-under-the-bed, the Sauron of macro, the bogeyman of governments everywhere since the early 20th century, and the purported source of all woes since the orgy of federal pandemic spending in 2020 and 2021 – has receded close to its startlingly low levels of the 2010s. In short, inflation is over.

IT’S IMPOSSIBLE TO OVERSTATE DEFLATIONARY PRESSURES:

How to Best Prepare for the AI Jobs Apocalypse: Companies are turning to AI to boost profits – and it’s working (Luke Lango, 8/28/InvestorPlace)

This quarter, on average, companies across the S&P 500 reported nearly 10% earnings growth.

That is one of the best earnings growth rates the S&P 500 has reported since the COVID-19 pandemic emerged in 2020.

At the same time, unemployment rates are rising sharply. Indeed, earlier this year, the national unemployment rate stood at 3.7%. Since then, it has spiked to 4.3%. Most folks expect it to keep rising.

In other words, right now… unemployment is rising… while corporate profits are also soaring.

That’s unusual. And it tells us that companies are using AI to replace human labor and productivity – and boost profits.

NEVERMIND HOW LITTLE WE SPEND AS A PERCENTAGE OF WAGES:

Food Profit Margins Shrink, But Harris Blames Them for Rising Grocery Bills (Joel Griffith, August 29, 2024, AIER )

What about industry-wide? Profit margins are shrinking as food manufacturing costs rose 28.4 percent since January 2020, exceeding the 26.3 percent retail price hikes on food items. Grocery store profit margins sank to 1.6 percent in 2023, the third consecutive year of decline after peaking at 3.0 percent in 2020.

In other words, grocer profit on $100 of sales is just $1.60. Profit margins contracted as overall food inflation totaled 20.6 percent in those three years. The biggest grocers have experienced this margin crunch. The Kroger Co. — the nation’s largest traditional supermarket — eked out an operating margin of 1.93 percent this past year, a margin lower now than it was pre-pandemic. These trends are the opposite of gouging.

History provides endless proof that prices set by governments under the market price results in shortages. Demand expands as supply shrinks. What good is a lower price if the shelves become empty?

IT WAS TRANSITORY:

Inflation News Is Still Exaggerated by Dubious Shelter Estimates (Alan Reynolds, 7/11/24, Cato)

Consumer Price Index (CPI) inflation has been zero for two months. Over the past 12 months, prices of food at home are up 1.1 percent, and energy prices are up 1 percent. Yet headlines keep focusing on the 12-month averages of 3 percent for the total CPI and 3.3 percent for “core inflation” (less food and energy). But there is a big problem: Those 3–3.3 percent figures do not reflect a broadly defined measure of inflation since they are largely dominated by shelter costs.

Widely criticized Bureau of Labor Statistics (BLS) estimates of rent and owners’ equivalent rent (a price nobody pays) account for a third of the total CPI and over 40 percent of the core CPI.

That is why suspiciously extreme estimates of shelter inflation (known to lag reality by 12–18 months) have continually exaggerated reported inflation since July 2022.

…AND CHEAPER…:

We Are Still Measuring Inflation All Wrong (Alan Reynolds, 2/26/24, Cato)

Owners’ equivalent rent purports to measure monthly variations in a price nobody pays, and to average those estimates for every house in the entire country. Nearly every other country wisely excludes such impossibly arbitrary OER estimates from their measure of inflation. Yet that singular made‐​up number dominates the US CPI, and to a lesser extent the Personal Consumption Expenditures (PCE) inflation index too.

Shelter accounts for 36.1 percent of the CPI and 42 percent of Core CPI. Shelter also accounts for 60 percent of measured inflation in non‐​energy services. This turns out to matter quite a lot, because estimated inflation for shelter has long been extremely high, while inflation for everything else has been extremely low.

The Graph shows that from July 2022 to January 2024, the average CPI inflation rate for shelter was 7 percent, yet the average inflation rate for everything else was only 1.2 percent. This January alone, the reported annual inflation rate for shelter was 6.9 percent, but inflation for everything else was 1.6 percent.

IT’S IMPOSSIBLE TO OVERSTATE DEFLATIONARY PRESSURE…:

Has the Great Upshift arrived?: Another strong quarter for US productivity growth is far from conclusive. But it’s also a super encouraging sign. Let’s enjoy it. (JAMES PETHOKOUKIS, FEB 1, 2024, Faster, Please)

[T]he US Bureau of Labor Statistics today released the 2023 fourth-quarter result for nonfarm business sector productivity, and it was pretty good — again. Productivity rose by a better-than-expected 3.2 percent during the final quarter of last year and was up by 2.7 percent on a year-ago basis. Even better, productivity growth has now increased at a rapid pace for three straight quarters, including 4.9 percent in Q3 and 3.6 percent in Q2.

Given both the advances in artificial intelligence/machine learning, which emerged before ChatGPT in 2022, and similarly strong productivity numbers in 2019, the last pre-pandemic year, it’s certainly worth contemplating whether we’re seeing the start of a (hopefully sustained) period of elevated productivity growth. Which would be totally awesome for several reasons.

For starters — and this is the thing that’s top of mind for most people, including Wall Street — strong productivity growth has contributed to a “Goldilocks” scenario where inflation has declined even as the economy has continued to grow.

…as labor and energy costs trend towards zero.

WHO DOESN’T EXPECT DEFLATION?:

Fed’s favorite inflation gauge cooled more than expected in November (Megan Henney, 12/22/23, FOXBusiness)

The personal consumption expenditures (PCE) index showed that consumer prices fell 0.1% from the previous month, according to the Labor Department.

RATES ARE USURIOUS:

Disinflation Dream Come True (Alexander W. Salter, December 1, 2023R, AIER)

The current target for the federal funds rate, which is the Fed’s key policy interest rate, is between 5.25 and 5.50 percent. Using core PCEPI growth, the inflation-adjusted range is 3.29-3.54 percent. As always, we must compare this to the natural rate of interest. Sometimes called r* by economists, this is the inflation-adjusted rate consistent with maximum employment and output, as well as non-accelerating inflation. We can’t observe this rate directly. But we can estimate it. Widely cited figures from the New York Fed place r* between 0.57 and 1.19 percent. That means current market rates are roughly three times as high as the estimated natural rate!

TRANSITORY IS AS TRANSITORY DOES:

Prices are going down. Here’s where you can see the difference. (Becca Stanek, 11/23/23, The Week)

According to Nerdwallet, citing data released in November by the Department of Labor, the “consumer price index — a proxy for inflation — remained flat from September to October, at 3.2%.” Moreover, the consumer price index report “shows year-over-year price index drops in 92 goods and services categories (among 338 measured).”

In further evidence of this trend, “retailers such as Walmart say an era of price hikes is fading,” The Wall Street Journal reported. Meanwhile, “Adobe, which tracks online sales through its analytics arm, predicts holiday discounting will hit record highs.”