Trend watch and what’s new this week
We are still seeing the remnants of the Thanksgiving holiday, which skewed much of the activity-based data in the past couple weeks (slides 5 and 6). This is apparent in air passenger counts, dining reservations, and hotel occupancy, which have bounced around the past few weeks.
Inflation cooled in November, but still a long way to go for prices
We continue to see evidence that inflation peaked. Wholesale inflation readings, measured by the Producer Price Index (slide 7), rose 0.3% in November, the same pace as September and October. On a year-over-year basis, it increased 7.4%, down substantially from the peak of 11.7% in March. Lower energy prices have been the biggest downward driver in recent months. Of course, wholesale prices eventually work their way into consumer prices.
Yet, the pace of core PPI, which excludes food & energy, rose 0.4% for the month and increased 6.2% YoY compared to 9.7% in March. Hotter core prices have largely been within services, which have reaccelerated during the past few months.
Used car prices continue to slide, as are gasoline prices
On slide 8, we revisit the price index of used vehicles, which have dropped in 9 of the past 10 months, including November. Prices are down 14.2% on a year-over-year basis, which is a far cry from the 54% spike in April ’21. SUVs and luxury cars are the segments where used car prices appear to be getting hit the worst.
On slide 9, the nationwide average price for gasoline has steadily declined since the peak just above $5 in June. It is now a few pennies from the year-end 2021 price of $3.29. Still, it remains more than 25% above the year-end 2019 price.
Services activity remains solid, along with more soft prices
The Institute for Supply Management (ISM) Services Index rose in November, continuing a 30-month expansion streak dating back to May ’20 (slide 10). Meanwhile, the price paid component continued its sharp decline, down for the sixth time in seven months (May through November). This is encouraging news on the inflation front as this is broader than the aforenoted services within wholesale prices.
Consumer sentiment recovering, inflation expectations slip
Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Index, rebounded in December (slide 11). It is up from weak readings in November and June, which was the lowest level since the series began in 1978. Meanwhile, within the survey, inflation expectations for the coming year slipped to 4.6%, the lowest since September 2021, while longer-term inflation expectations held steady at 3.0%. Inflation expectations are key indicators for the Federal Reserve, which is laser-focused on reining in inflation expectations.
Productivity recovering, while unit labor costs cool
Productivity, which measures output per hour, rose 0.8% in the third quarter following declines in three of the prior four quarters (slide 12). It is important in economics insofar as it relates to the standard of living, especially since productivity tends to increase wages over time. Meanwhile, unit labor costs rose 2.4% during the quarter, slower from an average above 7% over the previous four quarter. This is yet another indication that inflation is cooling.
A wide variety of prices—from gasoline and shipping costs to lumber and automobiles—have shown clear signs of cooling in recent months. After more than two years of sticker shock, this is welcomed news for most Americans.
We’re holding back on cheering just yet until we know if the cause is more troublesome. For instance, have prices recoiled because of weakening demand or the repair of supply chains? While we tend to believe it’s largely the latter, the answer isn’t entirely apparent.
Ultimately, the answer to that question presents a challenge for the Federal Reserve (Fed), which will continue hiking interest rates to further slow the economy to ensure that inflation doesn’t linger. The Fed is clearly concerned about prematurely letting up on the inflation fight—one of the Fed’s big mistakes during the 1960s and early 1970s, which took almost a decade and multiple recessions to control.
Unlike markets and pundits, the Fed doesn’t have luxury of waiting for “perfect information” that the inflation dragon is slayed prior to making the decision to stop.
Yet, given many clear signs of cooling inflationary pressures, we believe that the Fed will stepdown the size of hikes to 0.50% at the December 14 meeting after four supersized rate hikes of 0.75%. Beyond that, the Fed will need further evidence of cooling, especially by the labor market, before it slows the pace further or stops rate hikes.
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