Wall Street has a new defense: Inflation is peaking, so don’t sweat the fastest pace of consumer price acceleration in four decades. But there are reasons to doubt conventional wisdom.
The recent Purchasing Managers’ Index has been largely behind rising perceptions that pricing pressure is at the top. Nancy Lazar, chief economist at Cornerstone Macro, says the decline between new orders and production components from the Institute for Supply Management’s National Manufacturing Survey indicates the demand-supply imbalance is narrowing. Some economists found evidence of a peak in the December consumer price index, with Anita Markowska, chief economist at Jefferies, noting slow service-sector price growth and a steady rate of shelter inflation. And then producer prices fell from record levels, suggesting that businesses are feeling less pain and that soon consumers will too.
While the evidence of rising inflation is as welcome as it is compelling, the data grows exponentially in this pandemic era. this past week, baron’s Checked in with SpaceKnow, a New York-based company that tracks economies around the world from space in real time. The company’s Synthetic Aperture Radar satellites have night vision and see through clouds to scan US ports, thousands of logistics centers and major trucking stops.
Daily data gathered from space shows high port congestion – a big factor behind widespread supply-chain problems – which is not really improving. “We’re seeing massive overcrowding at US ports, with no sign of a big deal,” say analysts at SpaceKnow. This month’s container data, meanwhile, suggest that any supply-chain normalization has stalled. That’s not to mention figures showing worsening port congestion in China, which is a tough sign for domestic supplies.
takeaway? Anu Murgai, Vice President of Commercial Solutions at SpaceKnow, says it is too early to expect inflationary pressures to ease as the supply chain remains tense.
Now for the rest of the story. Ever since inflation began to climb, economists, policy makers and politicians have blamed the pandemic-induced supply constraints for the rapid and steadily rising prices. But there is evidence that demand is also driving inflation. This may seem obvious and inevitable given the amount of financial and monetary support over the past two years, but some combination of faulty predictions, wishful thinking and politics have made it unusual to hear that consumer demand is driving up prices.
Michael Darda, chief economist and market strategist at MKM Partners, calls this an “Alice in Wonderland monetary debate”, where economists are focusing solely on supply-side shocks as the source of inflation and evidence of demand-side inflation. failed to recognize.
Specifically, Darda points to nominal GDP growth. Driven by real economic activity and changes in prices, he says, NGDP has compounded at an average annual rate of 14.9% over the six quarters beginning in the third quarter of 2020. Looking at just 2021, the rate is 11%. Since the 1970s, when inflation was also hot, says Darda, we have not seen sustained double-digit NGDP growth.
“Rapid NGDP growth means easy money and demand-side inflation. End of story,” he says, explaining that NGDP is equal to money multiplied by its velocity and is thus a proxy for the central bank’s monetary stance. One can also look at the absurdity of declaring inflation without any reference to supply-side shocks, price controls, profiteering, etc.,” says Darda.
Must read more economic
The distinction is more than principle. Darda says inflation risks will remain high until the Fed achieves a more neutral policy stance, with the clear objective of keeping the NGDP at 4% to 5% annually, tightening the 2% to 3% average inflation. will correspond to. In other words, even if the supply chain returns to normal quickly, we still have a problem.
For investors interested in the weeds, there’s evidence of demand-driven inflation in clear vision. Consider the Bureau of Labor Statistics’ Experimental Price Index for New Vehicles, using data purchased from analytics company JD Power. The point of an experimental index, says Rob McClelland, former head of price-index research at the BLS, is to quickly spot user trends.
Published CPI data show annual new-vehicle inflation of about 12%, while the experimental index shows an annual rate of about 20%, McClelland says. Why the discrepancy? They say that the difference in methodology means that rising demand puts pressure on prices in the experimental index faster than in the published version. why is it important? Unlike normal times, when demand falls or shifts as prices rise, demand is rising and in an area that has been the poster child for supply shortages.
there’s more. The so-called on-chain CPI, which accounts for consumer substitutions in response to price changes, is growing faster than the fixed-weight CPI. McClelland says this unusual dynamics makes it appropriate to extrapolate from the Experimental Vehicle Index and assumes that demand – not just a lack of supply – is driving up prices in the economy.
If supply-chain optimism is dated and demand is driving inflation much higher than is commonly recognized, what are the consequences for investors? Things are going to get worse, and they will only get better if the Fed begins to tighten at least as aggressively as forecast for now. The central bank is part of the problem it must fix.
Write Lisa Beilfuss [email protected] Feather