Is Inflation Reaccelerating?
Signs that inflation may be picking back up
Inflation has fallen like a rock. I cheer, you cheer and we all cheer. Everyone is happy!
That must mean the worries over inflation are done. It’s no longer something that’s going to dominate the headlines. The meteoric rise in the cost of eggs will not be a storyline again.
That sounds a bit too easy. Maybe it’s wishful thinking. If we’ve learned anything over these past few years it’s that there is always something to worry about.
That brings us back to that lovely word, inflation.
Remember TIPS? TIPS (Treasury Inflation-Protected Securities) are a type of Treasury bond that offers protection against the loss of purchasing power of money due to inflation. The principal value of TIPS rise as inflation rises.
Have you noticed what has been going on with the TIPS flows? I didn’t think so. Neither have I up until recently.
TIPS flows are on the rise. They just saw their first inflow since August 2022 signaling a concern about inflation rising.
Why is this? What’s driving the inflation concerns?
Let’s check in on oil consumption. Oil usage has now made an all-time record. The demand for oil has never been higher. The world is using more oil than ever!
With higher oil causes, you guessed it, a rise in gasoline prices. Expect a rise in the prices at the pump to start. You can see from the below chart that gasoline prices relative to gasoline futures have further to rise. They’re already at the highest level in three months.
This past week also saw a durable goods number that surprised way above what the consensus expectation was. A 4.7% month-over-month increase, compared to the expected number of 1.3%. That’s almost four times higher than what was expected. That’s the biggest increase in orders since July 2020. An out of left field spike.
Why do durable goods matter and what exactly are they?
Durable goods are items that don’t quickly wear out. They aren’t used up in one use and are usually used over years. For example; cars, appliances (large and small), furniture, electronics, tools, jewelry and sports equipment.
I think of these as items that are usually expensive to purchase. A lot of these items tie into home ownership.
Which leads us into what’s happening with home prices.
Since January, the median home price is up 14% to $410,200. The all-time high was in June 2022 at $413,800. With the price back up now to $410,200, it’s within a stone’s throw (less than 1%) from a new all-time high median home price.
I discussed the possible increase in home prices on June 14th, in a post titled, Are Home Prices Headed Even Higher?
Zillow now expects U.S. home prices to rise 6.3% between June 2023 and June 2024. Among the 200 largest housing markets, Zillow believes 48 markets will see a jump of 7% or more.
Wait a minute! Weren’t home prices supposed to tumble? There was supposed to be a housing crash because prices had skyrocketed and mortgage rates were headed higher as interest rates were being quickly raised by the Fed. They were raised 11 times from March 2022 up until now.
But why have home prices hung in and how are they rising again?
The fact is that the rising of rates has not touched most Americans. As the below charts shows, only 11% of US household debt has an adjustable interest rate. Most Americans have fixed rates on their auto loans, mortgage and student loans.
So what is the debt rate at for interest rates on mortgages for instance? You guessed it. Extremely low!
US family mortgages totaling $13.5 trillion have locked in rates under 3%. Low rates are locked in for the long term.
The rising of interest rates by the Fed really hasn't touch the majority of Americans. But the worries over inflation still persist.
This illustration from Morgan Stanley shows that inflation is still the top concern among Americans across all income segments.
Judging by this, consumers are still seeing inflation. That’s why they’re still concerned about it. But that hasn’t stopped their spending. The resilient consumer has kept the economy hot and it looks to have avoided the all but certain recession that was supposed to happen.
Both the stock market and home prices are nearing new all-time highs. What does that do to consumer confidence? Consumers are more comfortable spending money. That’s because they feel richer. 401ks have a higher balance. Their home is worth more. Even if they’re not selling or cashing in to realize that money, they’re more comfortable and likely to be dining out, taking vacations, remodeling their house, buying durable goods etc. Which if you recall was part of what caused the rapid rise of inflation after the pandemic.
It’s possible this could cause the economy to pick up and start growing too fast again. The economy is hot and getting hotter. Thus creating another supply and demand imbalance. The strong supply chains could face pressure. Not to the extent we saw in past. It will be interesting to see what happens with oil and energy costs as we enter the colder months of the year.
The last thing the Fed wants is inflation to remain sticky and reaccelerate. Especially after what they’ve already done with raising interest rates to try and fight it. Reaccelerating inflation will be harder to fight and would bring risk to the economy and stock market.
Just when you think all is calm and the future looks bright, we’re reminded that there is always something to worry about.
The Coffee Table ☕
We were trying to plan where we’d like to go with kids on a spring break trip and I came across a good travel article called The 50 Best Places to Travel in 2023. I liked this list because it was actually sorted by what someone likes to do while on vacation.
Speaking of travel. This was the scene about 20 minutes south of our house this past week during the annual EAA in Oshkosh. Over 600,000 people and over 10,000 airplanes descend upon Oshkosh every summer for this spectacle.
This is such a cool video that shows in one hour just how many planes were coming in and out of the Oshkosh area for the EAA. Click the photo to see the video. If it doesn’t work for you, here is the link. Just imagine working in the air traffic control room.
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