August 29, 2023

It’s been a year already?

They say time flies when you’re having fun. If that’s true we must be having a blast!

Last Friday, Fed Chair Jay Powell stepped up to the mic to deliver his remarks at the annual economic jamboree held in Jackson Hole, Wyoming. They were tame compared to what he said a year ago.

In August 2022, he stepped to the mic and in nine minutes basically told those listening that he and the Fed were committed to bringing down inflation even at the cost of bringing the pain…

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.

Back then prices were rising at roughly an 8.5% annual clip. So strong words were probably in order. 

This year, headline CPI is treading water at 3.2%. You might say that’s one heck of an improvement, but Powell still toed a pretty hawkish line. Inflation is not where it needs to be. Their mandate is 2% — so 2% it is. And once again he warned of difficult times (but in much tamer language):

Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.

He may have to go back to his previous tone…

Inflation: Not Dead Yet

While headline CPI has been in decline for the past year,it’s far from beathen. The downward pressure has almost exclusively been coming from the commodity sector. A year ago food prices were rising nearly 11% year-over-year and energy prices were up a scorching 33%! As of the most recent report, food was up only 4.9% and energy overall was DOWN 12.5%.

Absent these two factors, inflation actually rose 4.7% instead of the reported 3.2%.

And it looks like they’re about to give in…

Where the energy market goes, oil demand has begun surging…

Goldman analysts estimate global oil demand climbed to an all-time high of 102.8 million barrels per day (bpd) in July and see solid demand driving a larger-than-expected 1.8 million bpd deficit in the second half this year and a 0.6 million bpd deficit in 2024.

And supply has been getting squeezed. Back in July, OPEC+ cut production by one million barrels per day. This came on top of a 2 million barrel a day cut agreed to by the cartel the previous October. The Wall Street Journal noted:

Taken together, the output cuts amount to about 3% of the world’s petroleum production taken off the market in seven months.

And recently they’ve just extended  those cuts through September. 

If and when commodity prices start to re-heat, all bets will be off for continued disinflation. And the Chairman is going to find himself in a tough spot. 

One Final Thought

Not to be a total pessimist, but… 

They say history doesn’t repeat, but it does rhyme. 

With that in mind I’ll just leave this chart from Managing Director and Chief Global Investment Strategist at Charles Schwab, Jeffrey Kleintop…

We’re not out of the woods yet…

Humbly yours,

Tim Collins
Editor, Streetlight Daily