A Conundrum On Inflation and Recession.

I'm not the brightest bulb and may be seeing things wrong, but... the Just in Case inventory surplus may be coming to an end.

To clarify... we had all sorts of supply chain issues, which were originally shortages of goods, due to parts, etc. THEN the supply chain issues became a snarled supply chain which caused shortages AND was exacerbated by companies ordering heavy to ensure arrival of supply to meet demand. This is Just In Case inventory control. 

The reduction in inventories allowed companies to pocket some hefty profits and pep up stocks. Everything from reduction of Oil and oil product inventories to freezers, etc. I even noticed my local Walmart pulled in those shipping containers all over their back lot.  

Now companies, such as Walmart and Target are talking about reduced profits, due to excess inventory. Oops! Certain major companies that supply all those retail stores with products (excluding food) are now beginning to cancel components to make their products... from their suppliers.

Understand the mantra is how the consumer's spending habits are changing. Seriously, how many TVs and Freezers, etc. can people buy for stimulus money they were given. 

As these companies slow their ordering to reduce inventory... a potential recession is looming. Meaning their inventory is no where near where it should be. Should be a buyers market at some point... just not yet. Again, this will not really impact food... as we still gotta eat. 

So these companies that had slowly began reducing inventory will now need to speed up. With interest rates sharply climbing, financing the debt to hold excessive inventory climbs as well. Not a good scenario to be in. Think GM in 2008, with their excessive inventory wish mushroomed and sales slumped to where they could not pay vendors.

Which brings me to the other part of this diatribe. How many zombie companies are about to be flushed out of the system?

The consumer, which is solely holding the economy together, will at some point overcome the euphoria of post covid and slow down the spending. My guess is a reduction will begin around fall, with an uptick for the holidays... and then the gloom of January will hit us.

Let's hope those companies have shed their excess inventories by then. Or as I think of it.. the time of steep discounts.

At some point, this may also impact the workforce, as it is not difficult to foresee it finally rebalancing and all those help wanted signs being stored away.

It will be a difficult time, as energy costs may linger and food is certainly not going to go down. I would expect the overall inflation rate to slide.

I probably should stop reading the hysterical headlines and let my brilliant leaders tell me how I should think and feel.

End of the Month... March 2022 PCE, Advance GDP, and Other Stuff.

With the PCE index report this morning, we can wrap up all the March inflation numbers. Granted, some slight improvement was seen in some areas, but still double digit increases on the upstream models seem to suggest more inflation to the consumer.

As mentioned last month, the core seems to be decelerating and the potential for further decreases appear on the horizon. A lot depends on China's current covid lockdowns and impact on the supply chain.

We also see the personal income and outlays for March. Note the current dollars and chained dollars. Chained dollars are only used in a couple of categories. So thrown in inflation and the numbers aren't exactly rosy.

Yesterday the GDP Advance 2022 1st quarter was released and failed to live up to expectations. Quite a bit was made about Consumers still lifting the economy and the trade gap really stifling the numbers. As for the consumers, the bulk of that lift was in the service sector as the goods sector was flat. The Services was up 1.0% quarter to quarter and the trade gap was down 1.4% quarter to quarter. Outside of those two, everything else was tepid, imo. Although Non-Residential Fixed Investment was 2.2% above previous quarter. 

One quarter does not a recession make, so the numbers could significantly change as more data becomes available. 

Of course, the books are now closing for March, and it is on to April numbers. So, the impact of China's covid shutdown policies will become evident real soon, the "official" impact won't begin to be known until June. 

As for consumer inflation for April, I would tend to believe that energy would be flat from March. Don't be misled, as gasoline appears to be edging up at this writing as well as Natural Gas. Core inflation might be decelerating a bit, but food does not appear to be decelerating. Overall, the CPI should "cool" to near 8.0%. Welcome to the late 70s and early 80s of last century.

The U.S. should once again become a net exporter, for the year, of Petroleum and Petroleum Products over the next few weeks, as the exports have ballooned to nearly a 1-million-barrel net exports on a daily average. That million-barrel daily release from the SPR is slated to begin May 1st.

Oh well, this is "fun" times we live in!

Other Stuff...

It amazes me in this day and age... how utterly devoid of knowledge, we Americans have become. Although I can find numerous instances where we are not alone in knowledge deficit.

A near direct quote "Our politicians are always promising to fund infrastructure, yet here we are in 2022 and they have done nothing", which is greeted with broad agreement. Apparently we must all forget Congress passing a $1.4 Trillion infrastructure bill and the President signing it on November 15, 2021.

Usually during this conversation, someone will mention that Trillion Dollar shovel ready infrastructure bill signed by Obama in 2009... and ask what ever happened to that? It never existed. There was a $787 billion stimulus bill, which included about $98 billion for infrastructure, of which a portion was for shovel ready.

We have become equally adept at ignoring stuff that happens and making up stuff that didn't happen.

There really is no hope, so why bother? Everyone slows down to see a car crash or a train wreck or any number of other such things. 

End of the Month... So February 2022 Inflation Numbers and Other Stuff.

 

With the PCE index report this morning, we can wrap up all the February inflation numbers. Granted, some slight improvement was seen in some areas, but still double digit increases on the upstream models seem to suggest more inflation to the consumer.

There does seem to be some potential for deceleration in core inflation, as decreased purchasing power is becoming more widespread. Inventories of retail and wholesale have increase ahead of inflation. Normally this could be seen as wonderful news, but it is hard to keep a straight face over lingering claims of supply chain shortages and increases in inventories, in my opinion. 

We all know that supply v demand is the determinant of pricing. If demand goes up and supply can't keep up... prices increase. Demand falls and supply increases... prices decrease. The past year saw demand pumped up with various stimulus checks and which contributed to "supply chain" issues. The benefit of that additional money is waning as retail sales minus inflation are flat to lower. Even more so with energy and food pulled from the equation.

As stated, core items might fall in the coming months, but what about energy and food?

Energy is struggling to supply to meet the demand. Regardless of any Strategic Petroleum Reserve activity... the demand will need to decrease for price relief. Going into the summer driving season, I am not so sure that will take place before August. Besides, that 1-million-barrel daily release will likely be exported, which may have impact on global prices, which may in turn trickle down to the US Consumer... eventually. We must remember the previous release announced last fall has not yet been completed. The 30 Million barrel release announced in March has not started, so just how quick will this happen?

Maybe in time for the midterms, but then you have the other headline issue...

Food, which accounts for about 14% of the Average American expense, compared to 8% for energy (>4% for Gasoline). Food is the one item that rarely sees a decline in demand and usually an increase as the global population is still growing. It really is all about supply and weather impacts of the past couple of years has NOT been conducive to slowing food price inflation. Throw in the Ukraine invasion and this is not an area that will likely seen any leveling off unless we get a good global weather pattern for crops and peace breaks out quick in war torn areas. 

Food is likely to be the issue for the next couple of years. A case could be made that Russia invaded Ukraine to control its large agriculture industry, to which it could use as influence amongst its friends, etc. Whatever the reason, it has clearly backfired, and the global community will become increasingly unsettled over food insecurity.

We will likely see the CPI in the mid 8% range in March's report and higher the following month. Much will be made about the high price of gasoline, but the food component is the real long-term story.

Forget the Oscars, as inflation is about to give us all a slap in the face. 

Near End of the Month, So January 2022 Inflation Numbers and Other Stuff.

 

ALL the inflation numbers are in and they are pointing upward, with the exception of PPI, which was flat. But the leading indicators of PPI are still in double digits. 

Quite a bit of chatter regarding energy prices and how they will ramp up inflation. There is no denying that, but every single number that excludes food and energy is up as well. Don't be misled by headlines screaming energy costs are going to cause double digit inflation. 

We might very well see double digit inflation, but if everything stays flat and energy were to drive up the overall inflation... then crude would need to be in the $180 @ bbl. We will be in recession, well before that occurs. Energy is a part of inflation, but not the entire story. Attempting to backward blame inflation on solely energy and current geo-politics, is to ignore the inflation prior to these events.

Those inflation factors are still prevalent and really no let up going forward the next couple of months. Previously the inflation was anticipated to peak in February (numbers due out in March), but those energy related and geo-political issues might edge up succeeding months. We were in the May/June timeframe of any year over year relief... which is prior to certain current events.

There is talk of the FED backing off rate hikes but maybe a bit premature. Granted the FED is looking for any excuse to avoid lifting rates, but they are behind the curve, so will raise rates, to make room for lowering them later on. 

As for Ukraine... they are not a member of the EU or of NATO, but a member of the UN. 30+ years ago, Iraq invaded Kuwait, which was also a member of the UN. A coalition was quickly and rapidly formed to kick Iraq out. Kuwait had oil, Ukraine not so much. 

Not sure how this thing will turn out, but it will soon become old news and everyone will move on. That is the sad state of things. There will be a period of media pictures and videos of bombs exploding, missiles being launched, but then this will become boring and no longer a driver of news ratings. 

Not unlike Covid, which still has a high death rate, but somehow is cured... at least to the extent it does not make more than a ripple in the news. Everyone is racing to get back to normal, which means accepting certain unpleasant facts. 

Currently the forecast for February CPI numbers (Due out in March 10th) stands in the range of 7.63% to 7.9%. 7.62% was the annual rate in February 1982. January 1982 was 8.39%.

Near End of the Month, So December 2021 Inflation Numbers and Other Stuff.

It's all the inflation numbers in one chart. As always, the MPI is most important to me, as it is what I spend.

The forecast across the board for January is upward... except maybe for the PPI. It's hard to imagine consumer spending slipping, inventories jumping and orders lagging... resulting in anything other than a deceleration of the PPI. But the experts seem to think May is when things will start to decelerate for all the above. In fact the PPI is forecast to reverse in May, back to 5 months ago range, which will somewhat stagnate the monthly CPI... not a reversal.  

BUT... a bit of history. Last year, there was consensus on helicopter money directly to the masses. Our leaders wanted it to jump start the economy and the FED said do it, we've got your back. The the term transitory became a popular word... until it was decided it might no longer be applicable to the current situation. 

So the FED is fixing to do something and the knives are out. Who knows what will happen?

Unfortunately for a lot of Americans on fixed income, it will not help, as the die is already cast. A fixed income limits any increases in spending and reduces the amount purchased. The alternative would be adding debt, which would now be costlier, if the rates are raised. It is a never ending cycle, imo.

Enough of the depressing news. I'll go watch some YouTube comedians or take a nap... or both.

Is My Attempt at Hoarding Merely Transitory?

 

It depends on definitions. An individual's life is transitory, in the grand scheme of things.

This term cropped up regarding inflation and it may or may not be transitory, but what about my hoarding habits, due to covid? I realize that Jerome Powell has said it might be time to retire the term "transitory". Seems like an admission that someone was wrong, when first describing inflation as merely transitory. Which begs the question of how much else might be wrong? Oh well, back to my situation.

Shortages early in the Pandemic caused me to add shelves inside the house; stuff the pantry full and then those added shelves being packed. It took a while to get that done but was largely completed in August 2020. At that time, it became just a matter of maintaining the stash. 

Since then, there has been limited contact with people and mostly visits to healthcare settings, etc. This has become normal, and I don't seem to have a problem with the lifestyle. In fact, discovering the many "curbside" opportunities have led me to the conclusion that I can get by quite nicely.

Having established the "stash" of goods, worry over shortages have abated. Granted, there are items each week that are marked "unavailable", but generally within a couple of weeks... they become available. The stash covers that, except for "perishables" which at times is hit or miss. Doing curbside from 2 different stores each week, reduces that as well.

Periodically, I try to evaluate the hoarded goods and estimate long term needs. Generally, this means looking at the world of covid, which currently looks dicey, even with double doses and boosters. 

Which brings me to discuss this Omicron variant. A lot seems to be missing regarding knowledge of this variant. I feel confident our own personal lifestyle should keep us safe from these variants. These variants will likely continue for quite a while as new types of vaccines will likely need to be developed and the lag time between development and sufficient global uptake to slow the rate of mutations... seems to be out of reach.

I would suspect the "supply chain" crisis will be alleviated in the spring, but that does not necessarily mean everything will be readily available, especially in the food area. When I refer to supply chain crisis, I am referring to the piles of goods at our ports, intermodal congestion, etc. We still have the issue of countries closing borders, the flow of goods, etc. You can't really have port congestion if there is no cargo coming in. 

Inflation will likely continue to be a factor, well into 2022, imo. I can almost guarantee the CPI for November will be at 40-year highs and December might ease a bit from the November numbers, as energy seems to be plateauing. However, nothing else seems to be easing, although it may well be the October retail sales, which were stellar and might just be people ordering Holiday "stuff" early... to avoid any potential shortages. That might explain the less than stellar sales of the past Thanksgiving weekend.

Food does not seem to be catching a break and given the disruption to meat packers, etc. due to covid; disruption to farmers worldwide, due to weather and covid, it would seem to indicate no immediate relief in the inflation trajectory. 

While most of our food supplies are of North American origin and would seemingly be safe from issues overseas, etc., the packaging materials, equipment, and replacement parts of equipment used in the food sector are not so safe, imo. 

Just as many industries are moving from the just-in-time model to the just-in-case model, it seems imperative that I consider that as well... which I did but need to continue.

I cannot say when I will ease off the hoarding or if I ever will. There are certain benefits to knowing I have enough to overcome most issues. So, renewing my zeal for hoarding and maintaining the current stockpile will continue and perhaps I will consider expanding, although the latter is much less likely.

Everything stated to this point is about unknowns, regarding inflation and supplies, but another worry and also unknown as well... is breakdown of societal norms, via social upheaval and in case anyone has forgotten... 2022 is an election year for all of Congress and 1/3 of the Senate. By the way... vaccine hesitancy will likely become a bigger issue, the Supreme Court is weighing in on some "hot" topics and people are generally in a bad mood over just about anything you can imagine. Some people are mad at other people because the other people are mad and it escalates from there. 

Outbreaks of the past have seen public trust eroded and with it... a breakdown in societal norms. The Spanish Flu saw some of these societal issues regarding trust in authority figures and the Black Plague was catastrophic.

Trust in leadership had been waning pre-pandemic and multiple factors not directly related to Covid... has eroded the trust even more. 

History indicates that breakdowns in society are not merely transitory, in that it requires changes over may years to achieve a new normalcy. Transitory might mean a lifetime.

Producer Price Index for September-2021

 

As you know by now, it was ugly for consumer's future prospects of inflation. Yes, a lot of this will get passed on to us. It is a sellers market, especially in food and energy. Here is the full report from the BLS.

From the horse's mouth...

The Producer Price Index for final demand increased 0.5 percent in September, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved up 0.7 percent in August and 1.0 percent in July. (See table A.) On an unadjusted basis, the final demand index rose 8.6 percent for the 12 months ended in September, the largest advance since 12-month data were first calculated in November 2010.

Nearly 80 percent of the September increase in the index for final demand can be traced to a 1.3- percent rise in prices for final demand goods. The index for final demand services moved up 0.2 percent. 

Prices for final demand less foods, energy, and trade services moved up 0.1 percent in September after increasing 0.3 percent in August. For the 12 months ended in September, the index for final demand less foods, energy, and trade services rose 5.9 percent.

For those thinking the FED might raise rates, the highlighted number above, seems to indicate otherwise. The FED always looks at things other than food and energy to gauge the economy. 

However, note that trade services is listed in the highlighted number. The final demand excluding food and energy rose 8.3% YOY and up 0.5% unadjusted from August or 0.6% when adjusted. 

About a third of the way down the full report is final demand goods and here is a summary...

I have highlighted a few areas that are above the monthly and annual numbers. Some areas look better on the annual, but the monthly looks terrible in my opinion, and suggestive of continued inflation going forward. Energy is almost reflected in real time as we all know the gasoline prices raise immediately, so yes gasoline and energy are "volatile".

Current forecast for core PCE is 0.22% for September and 3.7% YOY. That report is due October the 29th. I place the numbers here to track any forecast changes. 

So it appears this transitory phase could last into May of 2022. But then I had previously thought the supply chain issues would be resolved and groceries prices moderating by this PAST March. 

What do I know?

Can It Be True??

The world is falling apart...

Or is it simply misdirection by the Media? Think back a few years BT (Before Trump) and it seemed that chaos ruled the day. Then the chaotic Trump became the focus of the day. He has mostly left the stage.

Now every global distraction makes headlines and the right claims it is misdirection to prevent focus on Biden. There may or may not be truth to any of this... that is contingent on a political point of view. If the media is trying to distract from Biden, they are sure doing a p$$$ poor job. He is the President and the buck stops there.

Iran, Syria, Afghanistan, Iraq, North Korea, Russia, Venezuela and China existed BT. China makes the news more than it did BT. Afghanistan is being scrubbed from the news. Iraq coverage is nearly non-existent. Russia is about the same as BT, as is Venezuela, North Korea and Iran. Syria popped up today and I had forgotten about it.

About the only thing I can say is... Trump provided comic relief from the ills of the world. Somehow that doesn't seem right.

Mortgage Rates...

Seems to be going higher and might impact the housing market. This is due to the possibility of the FED reducing purchases of mortgage backed securities. If interest rates were seen to be rising, the push will be on to finance before rates go up further, imo. 

That was once considered the rule. Buy something in today's dollars and pay it off when the future dollar is cheaper... relative to inflation.

Rationing Healthcare...

Apparently, due to being overwhelmed with covid, Alaska has implemented rules where Hospitals can now ration healthcare. Insurance companies had been doing that since... oh the beginning of health insurance. That is probably not a popular statement, but you know it is true.

It isn't an election year.

I ran across this on the AP Website... AP: States and cities slow to spend federal pandemic money. 

All manner of high sounding reasons were given for the limited usage of the pandemic money. They want to be sure it is spent wisely, it would be frivolous to just throw it out there, etc. 

I'm sure it will be sorted out and spent before the run up to the next election. People would forget about it, if it were spent now. But imagine the photo opportunities for politicians seen cutting ribbons or handing out really giant checks during the election campaign. Free publicity is the best publicity, imo.

Think I am being cynical? Doesn't mean I am wrong.