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Thursday, August 11, 2022
The good news is that overall prices were unchanged between June and July, building excitement among economists that we may be past peak inflation. The bad news is that prices are still 8.5% higher than they were a year ago — much too high for policymakers.
A decline in energy prices contributed to the tick down (from 9.1% in June), as did declines in airline fares and car and truck rental prices. But the answer to whether or not we really have the worst behind us lies in inventory levels.
In other words, watch the discounts on patio sets and the number of Honda Civics or Porsche Macans at your local car dealership.
This was the running theme for big box retailers in the spring, when the likes of Target and Walmart warned that a glut of stuff in their warehouses would force them into discounting. The idea: get large, bulky items out of the back rooms to make space for food or personal care items that were getting crowded out.
But the July Consumer Price Index did not reflect any heavy discounting. Prices for living room, kitchen, and dining room furniture (the types of large, bulky items that the retailers were likely talking about) actually jumped by 2.7% between June and July.
One annoying aspect of this report is that household furnishings and supplies rose by 0.6%. So far, we have seen little of the discounting due to high inventories mentioned by big box retailers.
— Omair Sharif (@fcastofthemonth) August 10, 2022
One theory: Some furniture discounts are being offset by higher prices on other types of furniture.
Goldman Sachs keeps track of corporate earnings calls and measures mentions of higher prices versus lower prices. Their GS Company Price Announcement Index showed 28 out of 45 company transcripts mentioning additional price hikes later this year, compared to just 8 expecting lower prices.
“Together this suggests upward pressure on base pricing for consumer goods during the back-to-school shopping season—and likely into Q4 as well,” Goldman’s analysts wrote Wednesday.
Even if furniture prices did decline, the category makes up only a small portion of overall consumer expenditures (with a weight of about 1%, according to the Bureau of Labor Statistics).
A much larger expenditure is cars. New and used cars make up about 8% of total expenditures. And while used car and truck prices ticked down between June and July (down 0.4%), new cars did not (up 0.8%).
Tight inventory and strong demand for new cars remains the story for the auto industry, where dealers continue to face issues keeping the lot stocked with cars.
Kelley Blue Book reported Wednesday that a new vehicle sold in the U.S. for an average transaction price of $48,182 in July, again breaking the record in an “over sticker” market.
Hondas and Porsches were among the hottest new cars to fly off the lots, commanding prices 18% and 19% higher than July of last year respectively.
For autos, the story is not at all inventory glut like it is for furniture. The issue remains supply chain snags that can’t keep up with demand. Toyota, for example, continued to point to a shortage of global chips for hampering its production.
The common thread is a supply and demand equation that remains out of balance, making the outlook on inflation an uncertain one.
What to Watch Today
8:30 a.m. ET: Initial jobless claims, week ended August 6 (263,000 expected, 260,000 during prior week)
8:30 a.m. ET: Continuing claims, week ended July 30 (1.407 million expected, 1.416 during prior week)
8:30 a.m. ET: PPI final demand, month-over-month, July (0.3% expected, 1.1% during prior month)
8:30 a.m. ET: PPI excluding food and energy, month-over-month, July (0.4% expected, 0.4% during prior month)
8:30 a.m. ET: PPI excluding food, energy, and trade, month-over-month, July (0.4% expected, 0.3% during prior month)
8:30 a.m. ET: PPI final demand, year-over-year, July (10.4% expected, 11.3% during prior month)
8:30 a.m. ET: PPI excluding food and energy, year-over-year, July (7.6% expected, 8.2% during prior month)
8:30 a.m. ET: PPI excluding food, energy, and trade, year-over-year, July (5.9% expected, 6.4% during prior month)
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