January CPI growth disappointed the market:
Headline CPI fell to +3.1% y/y, still higher than Wall Street's forecast (+2.9% y/y).
Core CPI remained unchanged from previous month: +3.9% y/y (lower than forecast 3.7% y/y). (Weekly CPI report from Viet Hustler).
The market's disappointment stems from high hopes beforehand that inflation would fall below +3% y/y for the first time this year. But greater hopes lead to greater disappointment; now the market has shifted to betting on an interest rate policy of "holding for longer" (holding rates higher for longer): pushing back expectations for Fed rate cuts to June 2024.
Remember more than half a year ago (May 2023), headline CPI inflation suddenly dropped from +4.1% to +3%, causing most economists to fear deflationary risk (sudden deflation risk due to sharp drop in consumer demand).
But the story now is completely different; now they are again concerned about stagflation as:
Inflation becomes sticky: over more than 6 months, it still cannot fall below 3%.
GDP growth may slow: due to retail sales of the Control Group (group included in GDP calculation) declining sharply.
and unemployment may rise next year: as waves of layoffs from major companies return.
Therefore, Viet Hustler dedicates this weekend's macroeconomics article to reviewing the signs of stagflation for the US economy, through a series of important data from last week.
(I) Issues in the CPI report and consumer sentiment keeping inflation persistent (sticky inflation)
There are many signs of sticky inflation from: service inflation + super core service inflation + inflation expectations from businesses or consumers.
I.1. Service inflation remains the most pressing issue:
Core Services CPI growth still reaches + 5.4% y/y.
While core goods CPI is on a disinflationary path (-0.3% y/y).
To break down the factors affecting service CPI, look at the monthly growth figures (m/m):
Core services contributed >0.4% to the total 0.3% m/m headline CPI growth.
If only considering core services CPI growth alone: Core Services CPI increased to +0.6 m/m from the previous month.
Of which, housing cost inflation (orange) has increased again - accounting for 2/3 of core services CPI growth.
However, there is a big difference in the housing inflation category:
Rent prices continue to decline as expected from +0.39% m/m (Dec) to +0.36% m/m January.
But owners' equivalent rent (OER) increased sharply +0.56% m/m (from +0.42% m/m in December)
Both of these categories are volatile but rarely move in large opposite directions like last month.
However, Viet Hustler believes that housing inflation is the least serious issue (compared to the issues below) because the increase in CPI OER is not too severe:
OER is defined as the implied rent that homeowners would have to pay if they rented their homes.
Most homes purchased are nice homes to live in (which would have high rental costs if rented out): so OER is a highly noisy indicator…
As Viet Hustler emphasized earlier, rental prices will gradually decrease as market rental costs are falling:
Costs for new tenants - New Tenant Rent index (NTR - dark blue line) have decreased significantly along with actual market rental prices.
However, old rental contracts fixed at previous high prices keep CPI rent at high levels.
(CPI rent and ATRR - All Tenant Regressed Rent index remain high)
I. 2. Broad-based price increase trend returning, and no longer just a CPI housing issue
Super Core CPI growth (Core CPI excluding housing costs) surged to +4.4% y/y and +0.85% m/m in January.
Most m/m growth comes from transportation costs:
of which auto insurance costs contribute the most +0.63% m/m out of the total +0.97% m/m transportation cost growth.
Besides super core CPI, prices in January also rose broadly:
45% of items in the CPI basket are increasing at > +0.4% m/m (while in December, this figure was only 28%).
=> This shows that the persistent inflation problem (even the risk of inflation picking up again) is no longer just in housing inflation.
Of course, one month's figure is hard to reflect the trend.
If so, the latest 3-month average (3 MA - annualized) rising also confirms the rebound trend in core and super core CPI:
I.3. Final concern: inflation expectations are returning
Remember, inflation expectations were the factor driving inflation high in the second half of 2022: if people and businesses expect inflation, they will more easily accept higher prices.
And this scenario is returning:
Business side: under high labor cost pressure, businesses are willing to pass this pressure on to consumers.
Fed's small business expectations survey (NFIB): 33% of businesses expect to raise prices in the next 3 months => could drive PCE higher again.
PPI remains higher than expected, also showing that producer and wholesale prices are still higher than anticipated. (PPI report from Viet Hustler)
Consumer side:
Consumer inflation expectations for the next year also rose to 3% (> previous 2.9%).
(II) GDP growth may slow down based on predictions from retail sales
Stagflation does not mean recession, but stagflation could still be a failure of the Fed if GDP growth is low (not meaning negative, but will stagnate for a long time) while inflation remains persistent accompanied by rising unemployment.
Last week's January retail sales report showed a clear decline to the level -0.8% m/m (much larger than the forecast -0.2% m/m).
Of which, retail sales of the control group (Control Group - group included in GDP calculation) showed a clear decline -0.4% m/m - the lowest since 03/2023.
In particular, the sales outlook for retailers in Michigan and Texas in the coming time is also quite pessimistic,
indicating that actual retail sales may continue to decline in the next month:
This raises concerns that declining consumer spending will no longer be able to support GDP growth.
In particular, the retail sales report also aligns with Viet Hustler's previous prediction about the risk of consumption decline if excess savings (excess saving) in the population are depleted by the end of Q1/2024.
(III) The labor market may deteriorate if the layoff wave persists
The labor market has shown significant signs of cooling:
The average number of initial unemployment claims over the last 4 weeks is trending upward.
Meanwhile, the number of continued claims is also rising sharply => unemployed people are having difficulty finding new jobs.
The recent persistently high payroll numbers are due to the number of workers holding multiple jobs (> 2 jobs) reaching the highest level in history:
The NFIB small business survey shows: hiring plans + indicator showing hard-to-fill job openings (Job Openings hard to fill) have been and are normalizing.
Thus, businesses' labor demand is gradually normalizing rather than remaining as high as last year.
The layoff wave is spreading from the technology sector to education
Layoff announcements from a series of large tech companies are still continuing: last week added Cisco, Nike, NASA, Paramount…
About 34,000 tech sector employees have been laid off in just the first 1.5 months of 2024.
Many businesses are laying off employees for a common reason: optimizing operational efficiency (operational efficiency).
This phrase is being mentioned more than ever in corporate announcements:
The layoff wave may gradually spread to the education sector at public schools as federal budgets are being cut for the 2023-2024 and 2024-2025 school years.
The layoff announcement below comes from a public school in Long Island due to a budget deficit - USD 3.6 million.
… and the layoff wave is also gradually spreading to industrial manufacturing sectors:
CONCLUSION
Typically, stagflation is a situation of economic stagnation, accompanied by high unemployment and persistent inflation over a long period of time. Therefore, data from 1-2 months is still quite early to assess the possibility of stagflation.
However, it is difficult to rule out the possibility of mild stagflation if the Fed fails to decisively curb inflation before consumption declines. In that case, businesses will need to continue “optimizing operational efficiency” by laying off employees. People who lose jobs and run out of savings will also cut spending, leading to a recession.
Regarding the inflation situation, service inflation is hotter than ever as both the core housing services CPI basket and non-housing services show signs of rising again. The Fed may have to spend more time on service inflation because people's demand for entertainment, healthcare, and travel remains high after nearly 1 year of freezing due to Covid.
However, the severity of sticky inflation lies in the fact that prices are rising again on a general level (45% of the CPI basket). In which, inflation expectations from businesses and consumers are playing a negative role in this general price increase.
In addition, the Fed can still hope for a soft-landing if the Fed believes that as long as GDP growth is above 0% and the number of payrolls remains at record highs. But the economic burden will still be there if growth stagnates for a long time and too many Americans work multiple part-time jobs at once to pay for the increasingly high cost of living.
In addition, from a macroeconomic perspective, there are still 2 unknowns that could drag down the US economy's growth potential: public debt and potential banking crisis!
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