Global supply chains are finally functioning normally, as more consumers spend more on in-person services like restaurant meals and less on goods like furniture and computers that come from an ocean. The cost to ship a standard 40ft container from China to the US West Coast is $1,935, down more than 90% from its peak of $20,586 in September 2021 , according to online freight marketplace Freightos.
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Inflation moderation is just beginning to show up in government statistics. In October, the Federal Reserve’s favorite price gauge, the Personal Consumption Expenditure Index, recorded its smallest monthly increase since September of last year, and has increased by 6% over the past 12 months. The better-known consumer price index is rising at an annual rate of 7.7%, up from 9.1% in June.
“The worst of inflation is behind us,” said Steven Blitz, chief US economist for TS Lombard in New York. “The question is where is inflation setting in?”
The Fed has raised interest rates sharply since March in a bid to bring inflation back to its price stability target of 2%. Fed Chairman Jerome H. Powell noted signs of progress on Wednesday, but said it was far too early to claim victory. Friday’s stronger-than-expected jobs report, which showed wages rising too quickly for policymakers’ liking, only underscored the point. The central bank does not expect to hit its inflation target until 2025.
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“It will take a lot more evidence to confirm that inflation is coming down. By any measure, inflation remains far too high,” Powell told an audience at the Brookings Institution.
Still, there are clear signs of improving commodity prices, as consumers return to pre-pandemic spending habits. Excluding food and energy price volatility, goods prices rose 5.1% in October, compared to an annual rate of 12.3% in February.
But as the prices of goods begin to fall, pressure is mounting on services. Growing demand and limited supply — think lightly-staffed restaurants — has led to service inflation at an annual rate of 6.7%, more than double the figure a year ago.
“Goods prices are expected to continue to deflate. But services inflation will slow more gradually and be much stickier,” said Kathy Bostjancic, chief economist at Nationwide.
Much of what is happening with prices now reflects developments in specific markets or consumers returning to pre-pandemic routines. According to Zvi Schreiber, CEO of Freightos, falling shipping costs alone took about 0.7 percentage points off the inflation rate.
By making credit more expensive, the Fed has put a major dent in the housing industry. With mortgage rates briefly above 7% recently, pending home sales in October were 37% lower than a year earlier, according to the National Association of Realtors. But the full effect on the economy of higher interest rates will take several months to materialize.
Either way, consumers aren’t impressed. Less than 1% of respondents to a recent Census Bureau survey said they had noticed a drop in the prices of goods and services in the past two months. And 15.7% of households said they found it ‘very difficult’ to pay their living expenses, a figure that was virtually unchanged from the 15.9% who reported accessibility issues in June.
Certainly, in a $26 trillion economy, the prices of some products are always going down while many others are going up. In June, when inflation hit its highest point in more than 40 years, prices nonetheless fell that month for bacon, window coverings and men’s sweaters, according to the Bureau of Labor Statistics. It is therefore important not to exaggerate the recent improvement.
That said, the global economic context has changed.
With Europe and the UK in recession and China hampered by its restrictive zero-covid policy, global demand for oil has faltered. A barrel of Brent now costs around $85, a third less than in early March after Russia invaded Ukraine. As a result, the national average price for a gallon of regular gasoline is $3.47, down nearly 8% from a month ago, according to AAA.
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Many retailers find themselves with unusually high inventories, the result of two years of choppy supply chains. But as shipping and raw material costs have come down, companies like Ikea have recently started cutting some prices. Tolga Oncu, director of retail operations at Ingka Group, Ikea’s parent company, told Reuters this week he was “quite optimistic” about its ability to cut further prices in the coming months.
The company did not respond to a request for comment.
Walmart also said last month it would look for opportunities to cut prices. Sam’s Club, the company’s membership store, recently slashed the price of its hot dog and soda combo to $1.38 from $1.50, undercutting rival Costco.
“Living with high prices throughout this year is having a cumulative impact on our customers, especially for those who are more budget conscious, and so we are focused on reducing our costs and prices the most. quickly as possible by item and by category,” Doug McMillon, CEO of Walmart, told investors in November.
Chicken, cars and rents provide clues as to why forecasters expect inflation to ease in coming months, even if it takes years to get back to the 2% target from the Fed.
Chicken prices soared near a record high earlier this year. Covid restrictions on poultry factories, coupled with an unexpected drop in the number of chicks hatching, successfully led to a drop in supply as demand soared.
“It just created a ton of price pressure,” said Matt Busardo, market reporter for Urner Barry, a food industry information provider.
The situation reversed this fall, when production rebounded just in time for the typical seasonal drop in demand. The amount of chicken in cold storage has jumped nearly 20% since May, according to the US Department of Agriculture.
This has created good business – at least for restaurants. Wholesale prices for boneless chicken breasts have dropped dramatically over the past six months, Busardo said. At Wingstop, a Dallas-based fast food chain, executives said the cost of bone-in chicken wings fell nearly 43% in the quarter ending Sept. 24.
“We have a favorable outlook for commodities, not just bone-in wings, but also breast meat, which we believe will continue through early 2023,” Alex Kaleida told investors. Chief Financial Officer, October 26.
The company didn’t drop any retail prices, but said it was offering a new chicken sandwich for $5.29 and a combo meal of 20 wings and a large order of fries for $16.99 to split the savings. .
After soaring in 2021, wholesale used car prices are down 15% from January, according to Manheim, an Atlanta-based auto auction company. And those declines are starting to show up in the prices consumers pay, said Jonathan Smoke, chief economist at Cox Automotive.
New car prices will be slower to react. At the end of October, dealers had 1.56 million vehicles in stock, the highest figure since May 2021. That was enough to cover 49 days of sales, up substantially from a year ago but still well below from the pre-pandemic figure of 86, according to Barreur.
More abundant supplies mean fewer customers are paying above the manufacturers’ suggested retail price, a common occurrence during the pandemic. The average new car sold in October for $46,991, or $230 above MSRP, according to Edmund’s, a car-buying website. In May, the average buyer paid $721 above list price.
Improving conditions in the new car market are also driving buyers away from the used car market, contributing to lower demand and lower prices on these lots.
“The used market has benefited from abnormal demand throughout the pandemic as consumers have been pressured into buying used vehicles [who] could have or would have preferred to buy new,” Smoke said via email.
Apartment rents, meanwhile, after rising steadily throughout the year, are finally cooling down. The national average rent for a two-bedroom apartment rose 8.1% from a year ago, compared to 14.6% in April, according to Zumper, an online rental marketplace.
The shift has been particularly stark in cities like Boise, Phoenix and Austin, which have taken advantage of employee relocation to take advantage of the work-from-home era.
“Rental prices are cooling and cooling faster than anyone ever imagined,” said Zumper CEO Anthemos Georgiades. “23 is going to be a much more affordable year for renters.”
Real-time rental data takes months to show up in government statistics, Powell said in his speech to Brookings. But it will start to contribute to lower inflation next year, which is why most forecasters expect inflation to decline steadily.
The Fed expects its preferred inflation indicator, the PCE index, to hit 2.8% by the end of next year, up from 6% today.
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