AFMC - Consumer Inflation Is Fading Fast - And Producer Prices Turned Negative
2023-11-21 08:30:00 ET
Summary
- Consumer inflation is fading fast, and producer prices actually declined last month. This means the Fed is done raising key rates.
- The prices of imports also declined 0.8% in October, which is the first monthly decline since June, giving evidence of deflationary pressures.
- Another reason for the Fed to consider cutting rates is that the Labor Department announced weekly unemployment claims rose to 231,000 in the latest week, up from a revised 218,000 for the previous week.
- In the past 12 months, retail sales have risen 2.5%, but that is behind the 12-month CPI inflation total, so that explains why consumer sentiment has turned sour.
Inflation was indeed “transitory,” although it lasted longer than the Fed originally meant by that word.
The good news is that consumer inflation is fading fast. The better news is that producer prices actually declined last month, and the best news is that this means the Federal Reserve is done raising key rates.
First, the Labor Department announced last Tuesday that its Consumer Price Index ((CPI)) was unchanged in October and rose by just 3.2% in the past 12 months. The core CPI, excluding food and energy, rose 0.2% in October and 4% in the past 12 months. Shelter costs (owner’s equivalent rent) rose only 0.3% in October, down from 0.6% in September, which is encouraging. Also notable is that used vehicles dropped 0.8% in October and declined by 7.1% in the past 12 months. Overall, the CPI was below economists’ expectations, so Treasury yields all along the yield curve have declined sharply, which is very bullish!
On Wednesday, the Labor Department announced that its Producer Price Index ((PPI)) actually declined 0.5% in October and rose just 1.3% in the past 12 months. Wholesale gasoline prices declined 15.3% in October and accounted for over 80% of the net decline, while the core PPI, excluding food, energy and trade margins, was unchanged in October and rose 2.3% in the past year. Wholesale service costs were unchanged after rising for six months; so, overall, the PPI was much better than economists had expected.
I should add that the Labor Department, on Thursday, announced that the prices of imports also declined 0.8% in October, which is the first monthly decline since June, giving evidence of deflationary pressures.
This October collapse in America’s import prices and wholesale prices is partly due to the fact that we have been importing deflation from China, as China has reported actual deflation in its consumer prices, with a net -0.2% price decline in October. As America’s CPI and wholesale costs continue to cool, inflation is expected to continue to fall, raising hopes for the Fed to start cutting rates in early 2024.
The other big news last Wednesday was that the Commerce Department announced that U.S. retail sales declined -0.1% in October, which was better than the economists’ consensus expectation of a -0.3% drop. This was the first decline in retail sales since last March. Seven of 13 major categories reported a sales decline in October, led by furniture, vehicle sales and gas station sales. Grocery store sales rose 0.65% in October, but higher food prices likely boosted that figure. Health and personal care spending rose 1.06% in October, which bodes well for e.l.f. Beauty ( ELF ). In the past 12 months, retail sales have risen 2.5%, but that is behind the 12-month CPI inflation total, so that explains why consumer sentiment has turned sour.
Target ( TGT ) surged on Wednesday after its third-quarter earnings beat estimates. However, Target also reported a 4.9% same-store sales decline. Target’s CEO Brian Cornell described a “resilient” consumer managing to endure numerous financial headwinds - from student loan repayments to nagging inflation. Good inventory management and strong operating margins remain keys to profitability in the retail industry.
Another reason for the Fed to consider cutting rates is that the Labor Department on Thursday announced weekly unemployment claims rose to 231,000 in the latest week, up from a revised 218,000 for the previous week. This is the highest weekly claims for unemployment since August, so it appears hiring for the holiday shopping season could be below normal. Continuing unemployment claims rose to 1.865 million in the latest week, up from a revised 1.832 million in the previous week. This is the highest level for continuing unemployment claims in almost two years, since the week of November 27, 2021.
The other economic news on Thursday was that the Fed announced factory output declined 0.7% in October, the biggest drop in the past four months. A 10% decline in motor vehicle output, due to the UAW strike, exaggerated the drop in October factory orders. Excluding autos, factory output actually rose 0.1%.
Some Odd Outcomes at the San Francisco Summit
The meeting between Chinese President Xi Jinping and President Joe Biden in San Francisco last week left observers wondering whose side California was on, since China’s President Xi received a standing ovation after a dinner with U.S. business leaders, so clearly U.S. business remains eager to trade with China. At the dinner, President Xi said, “China is pursuing high-quality development, and the United States is revitalizing its economy,” adding that, “There is plenty of room for our cooperation.”
Obviously, President Biden needs some trade with China for his proposed green transition due to China’s dominance in producing solar panels, batteries and EVs. The Wall Street Journal reported last week that China has a massive glut of solar panels, polysilicon, batteries and EVs, which is raising global trade tensions. On the other hand, since the U.S. is China’s biggest trading partner, China needs the U.S. too.
I suspect that President Xi pushed President Biden to remove some tariffs, but the Biden Administration has been even tougher on China than the Trump Administration, so there was no progress on reducing tariffs last week. The primary achievement from the meeting between Chinese President Xi and President Biden is that tense communication channels have been reopened, including for their respective militaries.
The good news is that many homeless encampments in San Francisco were removed. The ground was pressure-washed and curbs were painted before the Asia-Pacific Summit so that many embarrassing sights were removed. For security reasons, large fences were erected for President Xi, which also happened in my neighborhood when President Xi and his entourage were staying up the street at a hotel in Manalapan, Florida, when he was meeting President Trump in April 2017, at Mar-a-Lago. Since under 400 people live in Manalapan, we thought the fencing in front of the hotel and down the road was a bit of overkill.
Speaking of China, today marks the earnings call for Nvidia ( NVDA ), the powerhouse of the AI revolution. To comply with the Biden Administration’s new chip restrictions on China, Nvidia will announce new AI and graphic chips for China. The previous chips Nvidia designed for China were recently banned by the Biden Administration’s new export restrictions. The announcement of the new chips should help boost the entire chip sector, since it will remove much of the uncertainty surrounding new Chinese export rules.
The big weekend news was Argentina’s Sunday Presidential election, where Javier Milei, a libertarian economist, scored a massive victory that is expected to have profound consequences, since he wants to peg the Argentina peso to the U.S. dollar. Milei, who sports Elvis-style hair and sideburns, is also a musician and often performs in front of crowds. He has made a successful transition from a fiery television pundit to a political leader who has promised to take a “chainsaw” to government spending.
With 133% interest rates, long gas lines, and a perpetually depreciating currency, Argentina must do something, since capital flight to Uruguay and other financial havens is all too common. A Milei victory is also likely to boost U.S. influence in Latin America, where China has become increasingly dominant.
Navellier & Associates owns Nvidia Corp. ((NVDA)) and e.l.f. Beauty, Inc. ((ELF)) in managed accounts. We do not own Target Corporation ((TGT)). Louis Navellier and his family own Nvidia Corp. ((NVDA)) and e.l.f. Beauty, Inc. ((ELF)) via a Navellier managed account and Nvidia Corp. ((NVDA)) in a personal account. He does not own Target Corporation ((TGT)) personally .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Consumer Inflation Is Fading Fast - And Producer Prices Turned Negative