Consumer inflation remains at 40-year highs … China is in turmoil, and so are supply chains … CFOs worry about “supply side” problems … record-high gasoline
The good news is April’s Consumer Price Index (CPI) reading from this morning came in lower than March’s reading.
The bad news is it still topped forecasts.
This morning’s CPI number showed that inflation accelerated 8.3% in April. While that was less than March’s 8.5%, it was higher than the expectation of 8.1%.
If we zero in on “core” CPI, which removes food and energy prices due to their volatility, we find that April’s reading of 6.2% was higher than the forecast of 6%.
One part of this morning’s report that jumps out to me is the shelter index reading. As the name implies, the shelter index measures costs associated with housing, not including investments and upgrades.
It hasn’t slowed over the past three months, having registered 0.5% each time. On a year-over-year basis, it’s up 5.1%, which is its fastest gain since April 1991.
It’s one thing for the price of your ground beef to jump, or even gasoline prices. It’s another thing when the single largest line item on peoples’ budgets – housing – keeps climbing. That’s the fastest way to impact discretionary income and the broader economy.
If the Fed was hoping that inflation would drop significantly on its own (preventing them from having to continue with an aggressive tightening policy), this reading won’t do it.
That said, “down” is certainly better than “up,” so let’s enjoy the win.
***Meanwhile, China accelerates lockdowns, despite falling Covid case counts
That sounds a bit inconsistent, right?
Why would Chinese leaders become more aggressive with their Covid lockdown policy if case counts are down?
Perhaps the best response comes from video of a Chinese police officer, apparently enforcing the rigid rules:
Stop asking me why. There is no why. We have to obey our country’s regulations and epidemic control policies.
Beijing’s totalitarian grip on its people is unflinching. Here’s CNN with the scope of what’s happening:
Shanghai is further tightening its stringent lockdown measures after China’s top leader Xi Jinping pledged to “unswervingly” double down on the country’s controversial zero-Covid policy, leaving millions confined to their homes with no end in sight.
Over the weekend, videos showing Shanghai residents arguing or scuffling with hazmat suit-clad workers and police officers while being forcefully taken away for government quarantine circulated widely on Chinese social media.
Many have since been removed by censors after sparking public anger.
Again, this is happening despite a drop in new Covid infections. Bloomberg reports that case counts in Beijing have fallen to the lowest level in more than six weeks.
Despite this, the restrictions and quarantining are actually increasing. Back to CNN:
Under the new hardline policies, even residents with negative Covid tests can find themselves placed into centralized government quarantine.
According to social media posts and local government notices circulating online, in several parts of the city, entire apartment blocks have been deemed a health risk, with all occupants forced from their homes and placed into quarantine on the back of one positive case.
One viral video shows residents arguing with police officers who showed up at their doors in hazmat suits to take them to quarantine after someone else on their floor tested positive.
I’ll add that “showed up” doesn’t even begin to describe the video. You can see these police offices kicking in a door to get access into someone’s apartment.
***As you can guess, this is massively impacting the Chinese economy, and by extension, global supply chains
This past weekend, Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation stemming from Beijing’s lockdown policy.
That’s obvious. When millions of Chinese citizens can’t go to their jobs, the Chinese economy will suffer. But the damage isn’t limited to China.
As we’ve highlighted in past Digests, China is an integral part of the global manufacturing and trade ecosystem. If it’s not running smoothly, neither are global supply chains.
On that note, here’s Economic Times:
China’s lockdowns to contain Covid have snarled operations at the world’s largest port in Shanghai and stalled activity in major cities, affecting the supply chains of businesses from Tesla Inc. to Apple Inc…
As manufacturer to the world, the disruptions in China are weighing on the global economy and add another risk to the inflation picture.
Early indicators for trade aren’t promising. South Korean exports, a barometer of worldwide demand, grew by double digits in April, yet shipments to China dropped, suggesting China’s slowdown is a product of its own Covid restrictions.
“Disruptions to production and deliveries may adversely impact shipments. The output and delivery components in April’s official PMI data deteriorated to the worst levels since the nationwide lockdown in early 2020.” –By the Asia Economists Team.
The longer these lockdowns are in place, the greater the potential for elevated inflation here in the U.S.
Earlier this week, Minneapolis Fed President Neel Kashkari commented on this.
On Monday, he noted that supply-chain issues are not disappearing as fast as he thought. And he isn’t confident on when they will begin to ease.
In an interview with
CNBC, Kashkari said “virtually all of that news is in the wrong direction,” pointing toward the war in Ukraine and COVID lockdowns in China.
Even though Kashkari was optimistic about falling inflation, he added: “But I am not yet confident on how much of that burden we’re going to have to carry vs. getting help from the supply side.”
***American CFOs see this “supply side” problem and are growing uneasy
From CNBC:
Consumer demand, and the inability for a throttled supply chain to keep up, could ultimately ensure that the Fed needs to become even more hawkish than it is currently telegraphing to control inflation.
This is the view of chief financial officers who recently took part in a CNBC CFO Council discussion about the central bank, interest rates and economy.
In short, a group of CFOs from top companies across various economic sectors suggested that the stock-market bearishness might be early, but not necessarily wrong.
That’s because while the Fed will do what it can to bring down inflation, it has no ability to affect supply. Clearly, Powell can’t fly over to China and get them to relax its Covid policy. Nor can he coax Russian soldiers off Ukrainian farms so the planting season can resume.
Back to CNBC:
A recession feels inevitable, according to multiple CFOs, with inflation already embedded, and the longer it stays around, the more difficult it becomes to wring it out of the economy…
Companies keep talking about their ability to pass on price increases to customers, but that pricing strength seems to be waning as a source of confidence for the C-suite.
One of the reasons it’s waning is because of the eroding effect of the cost of daily living. And on that note, yesterday we saw a new record.
***Even though inflation is slightly down in today’s CPI report, gas prices notched a new all-time high
Gas prices hit a new all-time high yesterday.
According to AAA’s average gas-price calculator, the national average cost of a regular gallon of gasoline climbed to $4.374 on Tuesday. That’s the highest price ever, according to AAA.
According to Louis Navellier’s favorite economist, Ed Yardeni, increased oil costs suggest that the average U.S. household is going to pay nearly $2,000 more for gas this year.
From Yardeni:
In addition, we estimate that the average household is currently spending at least $1,000 more on food as a result of rapidly rising grocery prices.
That’s $3,000 less money that households have to spend on other consumer goods and services, which also are experiencing rapid price increases.
Wrapping up, yes, there wasn’t a lot of positive data in today’s Digest. But hopefully, next month’s CPI reading will show today’s reading was the beginning of a sustained drop.
Meanwhile, keep your eyes on Chinese supply-chain issues and energy prices stemming from Russia/Ukraine/Europe. Any positive news related to these “supply side” challenges could be huge helps.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
