Global supply chains are finally functioning as normal as more consumers spend more on personal services like restaurant meals and less on goods like furniture and computers that come from the ocean. The cost of shipping a standard 40-foot container from China to the US West Coast is $1,935 — down more than 90 percent from a peak of $20,586 in September 2021, according to online freight marketplace Freightos.
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The moderation of inflation is only beginning to emerge in government statistics. The Federal Reserve’s preferred price gauge, the personal consumption expenditure index, posted its smallest monthly increase in October. since September last year and is up 6 percent over the past 12 months. The better-known consumer price index is growing by 7.7 percent annually, down from 9.1 percent in June.
“The worst of inflation is behind us,” said Steven Blitz, chief economist at TS Lombard in New York. “The question is, where does inflation settle?”
The Fed has been raising interest rates sharply since March in an effort to bring inflation back to its 2 percent price stability target. Fed chief Jerome H. Powell noted signs of progress on Wednesday, but said it was too early to claim victory. Friday’s stronger-than-expected jobs report, which showed wages growing too fast for politicians’ liking, only underscored that. The central bank expects to achieve its inflation target only in 2025.
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“Substantial more evidence will be needed to provide comfort that inflation is indeed falling. By any standard, inflation remains too high,” Powell told an audience at the Brookings Institution.
Still, there are clear signs of goods prices improving as consumers resume their pre-pandemic spending patterns. Excluding volatile food and energy prices, goods prices rose 5.1 percent in October from 12.3 percent year-on-year in February.
But as commodity prices begin to cool, the pressure on services grows. Rising demand and tight supply — think restaurants with low staffing — have driven service inflation to an annual rate of 6.7 percent, more than double the rate a year ago.
“We expect commodity prices to continue to fall. However, services inflation will gradually slow and become much stickier,” said Kathy Bostjancic, chief economist at Nationwide.
Much of what is happening with prices now reflects developments in specific markets or consumers returning to pre-pandemic routines. According to Zvi Schreiber, CEO of Freightos, the drop in shipping costs alone took about 0.7 percentage points off the inflation rate.
By making loans more expensive, the Fed significantly hurt the housing industry. With mortgage interest rates briefly above 7 percent recently, expected home sales in October were 37 percent lower than a year ago, according to the National Association of Realtors. However, the full effect of higher interest rates on the economy will take many months to manifest.
Either way, consumers won’t be impressed. Fewer than 1 percent of respondents to a recent Census Bureau survey said they had seen prices of goods and services fall in the past two months. And 15.7 percent of households said it was “very difficult” for them to pay for everyday household expenses, a figure that was virtually unchanged from 15.9 percent who reported affordability problems in June.
Of course, in a $26 trillion economy, the prices of some products always fall even as many others rise. In June, as inflation hit its highest level in more than 40 years, prices for bacon, window coverings and men’s sweaters still fell, according to the Bureau of Labor Statistics. Therefore, it is important not to exaggerate the recent improvement.
This means that the global economic background has changed.
With Europe and the UK in recession and China reeling from its restrictive zero-covid policy, global oil demand has fallen. A barrel of Brent crude now costs about $85, a third less than at the beginning of March after the Russian invasion of Ukraine. As a result, the national average price for a gallon of regular gasoline is $3.47, down nearly 8 percent from a month ago, according to AAA.
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Many retailers have unusually high inventories, the result of two years of choppy supply chains. But as shipping and raw material costs have fallen, companies like Ikea have recently started to cut select prices. Tolga Oncu, manager of the retail operations of Ingka Group, Ikea’s parent company, told Reuters this week that he was “quite optimistic” about the possibility of additional price cuts in the coming months.
The company did not respond to a request for comment.
Walmart also said last month it would look for opportunities to cut prices. Sam’s Club, the company’s warehouse membership store, recently cut the price of its own hot dog and soda to $1.38 from $1.50, undercutting rival Costco.
“Living with high prices this year has had a cumulative effect on our customers, especially the most budget-conscious, and that’s why we’re focused on reducing costs and prices by item and category as quickly as possible,” said Doug McMillon, Walmart’s CEO. investors in November.
Chicken, cars and rents provide clues as to why forecasters expect inflation to ease in the coming months, even if a return to the Fed’s 2 percent target will take years.
Chicken prices soared to an all-time high earlier this year. Poultry restrictions due to the Covid disease, together with an unexpected drop in the number of successfully hatched chicks, led to a drop in supply as demand soared.
“It just put pressure on prices,” said Matt Busardo, market reporter for Urner Barry, a food industry information provider.
The situation reversed this fall, when production rebounded just in time for a typical seasonal drop in demand. The amount of chickens in cold storage has jumped nearly 20 percent since May, according to the U.S. Department of Agriculture.
This has created some bargains – at least for restaurants. Wholesale prices for boneless chicken breasts have dropped dramatically over the past six months, Busardo said. Management at Wingstop, the Dallas-based fast-food chain, said the cost of bone-in chicken wings fell nearly 43 percent in the quarter ended Sept. 24.
“We have a favorable commodity outlook, not only for bone-in wings, but also for breast, which we believe will continue into early 2023,” Alex Kaleida, chief financial officer, told investors Oct. 26.
The company did not cut any retail prices, but said it is offering a new chicken sandwich for $5.29 and a combo meal with 20 wings and a large order of fries for $16.99 to share the savings.
After a sharp increase in 2021, wholesale used car prices are down 15 percent from January, according to Manheim, an Atlanta-based auto auction company. And those declines are starting to show in the prices consumers pay, said Jonathan Smoke, chief economist at Cox Automotive.
New car prices will react more slowly. Dealers had 1.56 million vehicles in stock at the end of October, the most since May 2021. That was enough to cover 49 days of sales, up significantly from a year ago, but still well below the pre-pandemic figure of 86. Cox.
Sufficient inventory means fewer customers are paying above the manufacturer’s recommended retail price, which is common during a pandemic. The average new car sold for $46,991 in October, which was $230 more than the MSRP, according to the car-buying website Edmund’s. In May, the average buyer paid $721 above list price.
Improving conditions in the new car market are also driving buyers away from the used car market, contributing to lower demand and falling prices for these lots.
“The used market benefited from abnormal demand during the pandemic as consumers were forced to buy used [who] could have or would prefer to buy a new one,” Smoke said via email.
Apartment rents, meanwhile, are finally cooling off after rising steadily all year. According to online rental marketplace Zumper, the national average rent for a two-bedroom apartment increased 8.1 percent from a year earlier, down from 14.6 percent in April.
The change has been particularly striking in cities like Boise, Phoenix and Austin, which have benefited from workers relocating to take advantage of the work-from-home era.
“Rental prices are cooling and cooling faster than anyone expected,” said Anthemos Georgiades, CEO of Zumper. “23 will be a much more affordable year for renters.”
Real-time rent data takes months to appear in government statistics, Powell said in a speech at Brookings. However, it will start to contribute to lower inflation next year, which explains why most forecasters expect a steady decline in inflation.
The Fed expects its preferred measure of inflation, the PCE index, to reach 2.8 percent by the end of next year, up from 6 percent today.