Data Story
The fear in the market continues to be around the pace of rate hikes to combat inflation. Our view, which is constructed using data, continues to support the notion that inflation is falling in the real economy, and that will further show over the coming months in Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).
Interestingly, the latest FOMC meeting showed FED member projections of inflation moving towards the mid 2-3% range in 2023 (hmm). We watch both indicators, as they both have significance, yet PCE tends to be a broader basket of goods and services and is also the inflation indicator that the FED provides estimates for.
So many indicators have been flashing deflation or decelerating inflation for months now. Here is just a few.
• Cost of 40ft container is down 75% in 2022, and down 50% over the last 60 days alone.
• Manheim Used Car index is down 13% from start of the year and if the index holds at these levels, it will be down 8% year over year. #DEFLATION
• Apartment List and Zillow data show that rental prices peaked in February/March and prices outright declined month over month.
• Gas prices are down 30% from peak levels this year.
• Lumber prices down 60% from the peak.
The list can continue, however, I think the point is clear as these are mostly input costs to consumer services.
Potential Investment Implications
The interesting part is that if you take a current PCE inflation reading today of ~5% (average of core and headline PCE), and you assume monthly increases of constant +.2%, PCE would move under 2% year over year in 4-5 months from now. That is the light at the end of the tunnel. Tick Tock...
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