3/23/2023 0 Comments Bubble letter chain![]() ![]() ![]() ![]() Including food and energy, the CPI increased and the PPI fell 0.1% (~1% annualized), however, while home prices as measured by the Federal Housing Finance Agency (FHFA) fell 0.6% (~7-8% annualized). During September and early October, the Fed felt vindicated in its tough stance by reports that inflation as measured by both the CPI and PCE Deflator excluding food and energy increased 0.6% (7~-8% annualized) and that the PPI excluding food and energy increased 0.4% (~5% annualized). The Fed seems focused on two variables that, in our view, are lagging indicators––downstream inflation and employment––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates. Facing inventory losses, used car dealers are likely to disgorge more inventories, which could push price inflation deeply into negative territory. In North America and on ships in transit, its inventories increased 64.8% and 85.0%, respectively! In the auto sector, used car price inflation as measured by the Manheim used value index peaked at 54.2% on a year-over-year basis in April 2021 and made another run to 46.6% in December 2021, but have dropped 13.5% year to date and now are down 0.1% year-over-year. Despite sales growth of only 3.6%, Nike’s inventories increased 44.2% globally. Nike’s recent quarterly results suggest that the inventory imbalances have worsened. In the face of single-digit sales growth, inventories at Walmart and Target increased 25.5% and 36.1%, respectively, during the most recent quarter. After grappling with supply chain constraints for more than a year, even world class companies seem to have overruled their automated enterprise resource planning (ERP) systems and over-ordered merchandise. Without question, food and energy prices are important, but we do not believe that the Fed should be fighting and exacerbating the global pain associated with a supply shock to agriculture and energy commodities caused by Russia’s invasion of Ukraine.ĭownstream, inventory accumulation seems to be overwhelming manufacturers and retailers. ![]() Most commodity prices have peaked and, except for food and energy, are falling on a year-over-year basis, as shown below. In our view, both are lagging indicators.Ĭommodity prices are leading indicators, upstream in the stages of processing. Then, we focus on the two variables––employment and headline inflation––upon which the Fed seems to be making its decisions. In this summary, we delineate first the upstream price deflation that is likely to turn into downstream deflation. In the face of conflicting data, the unanimity of the Fed’s last decision to increase the Fed funds rate by 75 basis points was surprising. In ARK’s latest In The Know video, out of concern that the Fed is making a policy error that will cause deflation, we offered some data for our “data-driven” Fed to consider as it prepares for its next decision on November 2. ![]()
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