• Food prices increased around 20% from 2021 through 2023 and have changed little since. This applies both to the cereal and bakery products index and the food at home index.
• After soaring as much as 40% in the wake of the pandemic, the price of used cars and trucks have declined since late 2022.
• In the last few months new cars also dropped into negative inflation territory.
• Inflation for durable and non-durable goods has cooled significantly since the 2022 peak with durable goods in negative territory since 2023.
• In all states across the country, the change in median income required to buy a home soared from 2019 – 2023 usually in multiples of the change from 2014 – 2018. California of course tops the list: 2% from 2014 to 2018 vs 18.8% from 2019 to 2023.
• Overall hourly wages have lagged inflation since 2021.

The article also presents some stark economic realities starting with this contrast between how people feel about their own economic circumstances versus that of the country as a whole: “In the Fed’s 2023 Survey of Household Economics and Decisionmaking, the share of those saying they were doing ‘at least okay’ remained over 70%, lower than the 78% peak hit in 2021, but roughly where it was before the pandemic. By contrast, a dismal 22% rated the national economy ‘good’ or ‘excellent’.”

Additionally, there are important shifts in measurements of well-being:

• There is unsurprisingly a direct inverse correlation between income and the share of households self-reporting difficulty in meeting expenses. However, this share has trended upward since late 2020 for households making at least $100,000. Households below that income level have generally self-reported small improvements in the past three and a half years.
• Through the end of 2023, inflation-adjusted net wealth of Black households has fallen below levels from the start of 2019.

These data paint a picture of an economy where inflation still weighs on the minds of Americans even as certain inflation pain points have come under control. Given this environment, it is no surprise that the Fed has slow-rolled expectations for rate cuts. However, with the market now pricing in near certainty for a rate cut in September, the Fed may finally be forced to take the plunge and test out inflation expectations.

A Trade on TLT

Since 2021, the core CPI (the consumer price index) has taken the escalator up and the stairs down. Seemingly in expectation of little additional improvement in inflation, long-term bond yields seem to be settling into rangebound trading. Accordingly, I drew new presumed trendlines for the iShares 20+ Year Treasury Bond ETF (TLT) to adjust my trading rules for fading TLT.

Prior to the June 3rd breakout for TLT, I cound consistently fade TLT from the top of a downward trading channel (the dashed blue line). After the breakout, I faded TLT rallies with an expectation of tests of the previous downward channel as support. The soft CPI print for June that drove September rate cut expectations makes me think a new sideways trend is unfolding. The chart below has horizontal black lines that represent the tension and tug and pull between a slow cooling in inflation and the potential stimulative impact of a rate cut cycle ahead of any significant economic weakness.

I used the top of the trading range to twice fade TLT with put options. However, I was not patient enough to see TLT below its 20-day moving average (the black dashed line above). Thus, it is possible I will eventually move the bottom of the trading higher.

Be careful out there!

The post An Inflation Story appeared first on Inflation Watch.

Inflation landed around 20% in 1947 according to the NY Times who also claimed it was the worst inflation America experienced over the past 100 years. The article did not specify the inflation measure, so for the purposes of discussion I assume the article referred to the entire Consumer Price Index (CPI). If so, then the 20% figure must have been for a particular month in 1947. The annual inflation for 1947 was 8.8% according to Investopedia, far short of the highest level over the past 100 years. Inflation the year before soared to 18.1% from 1945’s 2.2%. While it looks like the NYT selectively picked an inflation number for effect, it is clear that sentiment on inflation during this time was as dour as one should expect during a period of exceptionally high inflation. The following bullets are mostly direct quotes from the article reordered chronologically:

• In December 1947, more than 70% of adults said they would want their own wages to decline in order to bring prices down.
• In polling throughout 1947 and 1948, a majority supported reinstating wartime rationing and price controls.
• Before the conventions, voters said a plan to address high prices was the No. 1 priority they wanted in a party platform. More voters said they wanted prices to be addressed over the next four years than any other issue.
• In June, 1948, a majority of voters expected prices would be higher in six months (at election time in November, only 18% of voters expected the same).
• As late as summer 1948…adults expected prices to keep rising.

A combination of economic pressures sent inflation soaring.

Post-war supply shortages combined with the end of price controls to light a fire under inflation. The NY Times article pointed out that labor unrest following World War 2 exacerbated supply shortages. For example, the National WWII Museum in New Orleans observes: “With the end of the wartime no-strike pledge, workers across America expressed their frustration with wages and working conditions through a series of strikes that involved over 5 million people from the end of 1945 and into 1946.” Strikes hit broad swaths of the economy: mills, telephone service, meat packing, and General Electric (a major industrial employer at the time). The railroad strike of 1946 crippled large parts of the economy (the interstate highway system did not start until Eisenhower’s presidency in the 1950s). No doubt all this economic disruption helped dampen the national mood alongside the resulting price pressures.

Layer on pent-up consumer demand and the economy got hit with a perfect inflationary storm. Benefits from the GI Bill, not mentioned in the NY Times article, helped to stoke consumer demand. For example, while the country built very little housing during World War II, the GI Bill offered returning soldiers low interest, zero down payment home loans with better terms for newly built housing. Although Black servicemen were often denied benefits of the GI Bill (and thus they were often left in poverty), such incentives must have contributed to increased pricing pressures in the economy.

The NY Times article also did not consider the potential price distortion from large amounts of U.S. resources funneled into the Marshall Plan. The Marshall Plan kicked off in 1948, and it is plausible suppliers felt emboldened to increase prices in anticipation of the largess. Supply responses in Europe would eventually erode this pricing power.

Fast forward to today and we find parallel economic distortions putting pressure on prices. Massive fiscal and monetary stimulus stoked demand, especially for housing and related goods. Government supported pandemic savings have apparently supported on-going strength in retail spending. Wage growth has also supported robust consumer demand. While today’s labor unrest pales in comparison to post-war labor actions, the scales have tipped in favor of labor for now. Unemployment remains at historic lows, and employers have readily absorbed the rebound in the labor force participation rate. U.S. industrial policy could apply its own upward pressures on prices in the economy.

The Federal Reserve on the Sidelines of Late 1940s Inflation

The volatile cocktail of inflationary pressures must have complicated monetary policy. Compared to today’s tornadic monetary policy response, the Fed’s rate hikes in the immediate post-war years look exceptionally timid. The Federal Reserve essentially sat on the sidelines as the economy convulsed through its inflationary pressures. From “A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954“:

Today’s deflationists would have been particularly happy with the timid Fed of the late 1940s and early 1950s! Fresh memories of the economic devastation of the Depression no doubt also slowed the hand of the Fed. The NY Times article did not delve into the role of the Fed in allowing inflation to take its course in the post war years.

Inflation Today

Pandemic disruptions are mostly in repair, but Russia’s invasion of Ukraine has caused its own supply disruptions. The Israel-Hamas war threatens to cause disruptions in global oil markets and shipping lanes in the Gulf. Growing tensions between China and Taiwan and increasing authoritarian control over the Chinese economy have motivated companies to leave China in search of “safer” countries for production. This transition will likely pressures prices through increased production costs and the short-term transition costs.

In other words, while financial markets celebrate the end of the Federal Reserve’s fight against inflation, there are plenty of looming inflation risks, any of which could deliver setbacks to current trends. Seventy-six years ago inflation came to a boil and then yielded through the 1950s and early 1960s. A parallel peak for today’s inflationary era would be welcome news!

The post Inflation Now, Inflation 76 Years Ago appeared first on Inflation Watch.

“Inflation has increased in Australia, but it remains lower than in many other countries; in underlying terms, inflation is 2.6 per cent and in headline terms it is 3.5 per cent.”

Seeing that data, I wondered whether the soaring prices of commodity exports and the resulting stronger Australian dollar are helping tamp down inflation. The RBA mentioned neither of these potential drivers. Instead, the central bank fingered low wage pressures:

“Wages growth has picked up, but, at the aggregate level, is only around the relatively low rates prevailing before the pandemic…Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. “

This sluggish wage growth is giving the RBA the luxury of standing still on monetary policy. The statement gave no hint of a specific time horizon for tightening rates. The RBA is waiting for “…evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates.” In other words, wage growth is so slow that there are risks to the downside for inflation.

The Australian dollar reacted well in advance of and following the statement. A larger sell-off in financial markets the next two days reversed all the gains for AUD/USD.

Be careful out there!
Full disclosure: short AUD/USD

The post Low Wage Pressures Suppressing Inflation In Australia appeared first on Inflation Watch.

The current and projected jumps in labor costs are dramatic:

“…wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics. A labor ministry survey of 91 cities in the first quarter showed demand for workers outstripping supply by a record amount, pointing to low unemployment…

…At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.”

These wage hikes are coming off low levels. For example, as of February of this year, Hon Hai Precision Industry Co, the company that manufactures Apple (AAPL) iPads, reported a 10% increase in base salary for its factory workers to 2,200 yuan ($345) per month.

Moreover, the supply of new, young workers will decrease thanks to China’s one-child policy:

“In 2005, there were 120.7 million Chinese people aged 15-19, according to United Nations estimates. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.”

Finally the government is forcing the minimum wage and benefits higher:

“China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.”

It will be interesting to watch what happens to China’s economy as its manufacturing competitiveness declines slowly but surely with the increase in wages.

The post Wages on the rise in China appeared first on Inflation Watch.

“Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.”

This is a sobering statistic that has potentially dire implications for the economy in general. Compare this situation to that in China where an on-going study in the New York Times concludes that China’s government has propped up its banks and large corporations at the expense of Chinese workers (see “As Its Economy Sprints Ahead, China’s People Are Left Behind.”):

“Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.”

Neither system, in the U.S. or China, appear stable to me. With China dependent on the income (or rising debt) of U.S. workers to keep its exports alive, these systems of increasing inequity actually start to look increasingly unstable. I will be monitoring these processes even more closely going forward. They are certainly deflationary, not inflationary.

The post U.S. workers missing out on the “reflation celebration” appeared first on Inflation Watch.

This weekend, I noted two state-based stories on executive pay that demonstrated how dramatic a turn-around has occurred in the pay for specific executives.

In “Lucrative paydays for corporate chiefs“, the Atlanta-Journal Constitution reports:

“Here’s one measure of just how good it was: $232.9 million.

That’s the total compensation that the chief executives at Georgia’s 25 most-valuable public companies took home last year, according to The Atlanta Journal-Constitution’s review of the annual disclosures required by the Securities and Exchange Commission…

Here’s another measure of just how lucrative 2010 was: 29 percent. That’s the average pay raise the 25 executives saw last year.”

In “Arizona CEO’s median compensation surged 48% in 2010“, The Arizona Republic reports:

“Sparked by rising profits and rebounding stock prices, the median compensation for chief executive officers and chairmen at Arizona-based public companies surged 48 percent in 2010, hitting a statewide record of $1.54 million.

Plus, hefty pay packages were shared more broadly by other top officials at 43 corporations based in the state. Some 74 senior executives below the CEO level earned at least $750,000, up from 63 who earned that much the year before.”

In both cases, compensation swelled partially thanks to a strong rebound in the stock market, meaning that corporate executives have greatly benefited from the reflation generated by economic stimulus and/or monetary easing. As I have mentioned in previous posts, strong corporate profits have supported all forms of equity-based wealth and effectively beat back the ghosts of deflation in 2010.

Of course, the huge irony is that poor employment reports and stagnating personal income data tell a different story. For example, after Friday’s awful jobs report and the on-going dire news coming from the housing market, you would be excused for assuming the entire country had dipped back into a poverty-stricken recession. Such is definitely not the case for the big winners of 2010.

The post Reflation celebration for corporate executives in Arizona and Georgia appeared first on Inflation Watch.

The article includes an interesting discussion of “performance share units” which calibrates performance-based pay to the company’s relative performance to its peers. This method prevents pay hikes from general market forces that the CEO does not control, like the rising price of oil.

The post Pay rises 13% for CEOs at Canada’s top 100 public companies appeared first on Inflation Watch.

From AP:

“The typical pay package for the head of a company in the Standard & Poor’s 500 was $9 million in 2010, according to an analysis by The Associated Press using data provided by Equilar, an executive compensation research firm. That was 24 percent higher than a year earlier, reversing two years of declines.”

“Executives were showered with more pay of all types — salaries, bonuses, stock, options and perks. The biggest gains came in cash bonuses: Two-thirds of executives got a bigger one than they had in 2009, some more than three times as big.”

This situation presents an odd dichotomy. The housing market remains moribund and likely double-dipped, the unemployment rate and jobless situation has shown little improvement in many, many months. Yet, corporate profits and CEO pay could not be better. Even as the Federal Reserve seeks to keep monetary policy loose and accomodative, I suspect the current momentum will continue as companies continue to make hay with what they’ve got: more jobless profits…

As is said when the Fed prints money, it has to go somewhere. We have found one more resting spot for that fresh cash!

The post CEOs recover all the pay they lost during the recession appeared first on Inflation Watch.

“Given that every full-time employee gets health insurance and other benefits that make up anywhere from a quarter to half their overall compensation, and that health-care costs are rising in the double-digit percentages, it’s safe to assume that U.S. tech companies are seeing employee costs rise in the double figures, as an annual percentage.”

In 2009, wages in high tech went up 5-10%. So Shinal’s assessment is consistent with a labor market that was relatively tight even at the height of the recession and beginning of the recovery.

The post Compensation in High Tech Inflating Labor Costs appeared first on Inflation Watch.

The good news is that the salaries and benefits for college presidents at public universities held steady the last academic year (2009-2010) as reported by AJC.com in “Study: Recession hasn’t cut college president salaries“. This was no easy feat given the generous compensation:

“The median total compensation for 185 presidents running the country’s largest public research universities was $440,487. About one-third earned more than $500,000 and the 10 highest earned more than $725,000 each. Ohio State University President E. Gordon Gee received $1.8 million, the highest.”

Of course, staying flat is nothing compared to the 27% hike in median pay for the nation’s CEOs in 2010, but those increases only restored CEOs to pre-recession levels. A University of Georgia spokesman defended the pay for presidents by pointing out the limited supply of qualified candidates for the job.

The bad news about inflation on college campuses is that tuition increased. Students paid a whopping 25% more in tuition in the last academic year. Assuming most of them will not grow up to be CEOs, they can probably look forward to working in a company where their salaries will not keep pace with the head honcho. (The average compensation package increased 2.1% last year).

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