The inflection point of inflation
Some data as to why inflation numbers may peak sooner than we think
The January CPI report was not good news. The year-over-year inflation rate came in at 7.5% - the highest number since February 1982. This well-outpaced analyst estimates of 7.2%, and drove fear into the markets that the Federal Reserve may have to take much more aggressive measures with their rate hikes and tapering.
A quick breakdown of the CPI data:
Used Car Prices: + 40.5% YoY
Gasoline Prices: +40.0% YoY
Gas Utilities: +23.9% YoY
Meats/Fish/Eggs: +12.2% YoY
New Car Prices: +12.2% YoY
Electricity: +10.7% YoY
However, delving more into the data would suggest that inflation may not be as persistent as we think. In fact, we may already be near the inflection point of inflation.
Exhibit 1
Gasoline and WTI prices are already beginning to show weakness. This is currently not being reflected in CPI data but history would suggest that both are great leading indicators of where the CPI is headed.
Exhibit 2
A look at the private inventory of durable goods reveals that it is now at its highest point in the past 2 decades. Why? Due to the supply chain hurdles, companies have stocked up their inventory ahead of time so that they can meet future consumer demand. But trends suggest that many companies may have overestimated the demand for their products.
The sales growth is currently lagging behind the growth in inventory. The inventory/sales ratio bottomed out in May of 2021 and has been rising sharply since.
Exhibit 3
Consumption as a percentage of income rose sharply with each stimulus check provided by the U.S government. However, with no more stimulus in sight during a midterm election year where inflation is a raging political issue, we should expect some form of mean reversion. That is to say, we should expect to see durable consumption decline sharply throughout the rest of this year.
Exhibit 4
Producer Price Index (PPI) numbers have already started to decline within the largest producers of the world. China, in particular, is also facing some major economic headwinds due to a government crackdown and the unwinding of its real estate industry.
Exhibit 5
Assuming modest tapering from Central Bank this year, inflation should come down with it. Historically, the Central Bank balance sheet has been a great leading indicator of CPI.
Hopefully, this data provides some food for thought around inflation and where we can see it trending in the near term. I am of the view that deflation is a much bigger risk in the long run, but we’ll save that for another article.