Thank you America, for now
America making it great again (sort of)
I can’t believe I’m writing this but for the first time in a very long time, I actually have some good news about the economy.
The United States plays a leading role in the global economy with its inflation rate being one of the most closely watched economic indicators in the world. To give some perspective, the GDP value of the US is estimated to be around $21 trillion. They are the biggest economy in the world. The inflation rate in the US is used as a benchmark by central banks around the world. It can have a significant impact on global financial markets and it’s an important indicator of how healthy the economy is.
That said, recent drops in energy wholesale levels have opened up a bit of breathing room for inflation to ease up and take a chill pill at the moment. According to the Bureau of Labor Statistics, the 9% drop in energy prices accounted for 80% of the total decline in goods prices. Overall, that leads to the producer price index, which determines the prices received for final demand products, to fall by 0.5% from June.
This was the first time something like this happened since April 2020. Remember that everyone? Just a month after COVID-19 was declared a global pandemic and we all thought we just needed to stay at home for a couple of weeks? *hesitant laughter*
“Cooling prices paid by producers portend a further cooling for consumer prices, as producer prices are further up the inflation pipelines,” says Jeffrey Roach, chief economist at LPL Financial. As supply chains further improve, producer prices should continue to drop at a more ideal level for the consumers. However, it could take a couple of months for those stars to align. What we have now is at least a good start and hopefully, a sign that there’s more to come.
Even economy experts are tired of the whole will-they-won’t-they tension between inflation and recession discussions. “The whole recession narrative really needs to be put on a shelf for now,” said Aneta Markowska, chief economist at Jefferies. Markowska is confident that we could see a 3% growth rate during the third quarter.
Buy now, worry later
Even though the prices of goods had a better growth mindset than a random rank-and-file worker at a corporate office, consumers still had no problem with spending their money. Jonathan Silver, CEO of Affinity Solutions, claimed that spending habits were at a healthy pace with a 10.5% increase from last year. They were able to determine this by tracking credit and debit card transactions. Personally speaking, my wallet does not believe that it’s healthy at all.
Although, inflation has shifted the market behavior. “When you start to look at specific categories, there’s been a lot of shifting in spending, and as a result, some categories are being impacted more than others by inflation,” he said. “People are delaying their spending on discretionary items,” Silver adds.
You can see this with department store spending falling by 2.4% over the past year, while discount store spending has risen by 17%. Amusement park spending is down 18%, but movie theaters are up 92%. Remember when people thought cinemas were dying?
Silver believes that the more inflation eases, the more discretionary spending will happen again. “We believe there will be a spike later in the year that will create an upward slope to spending in key categories where the consumer has been delaying and deferring spending,” he said. “Consumers may get a holiday present of some relief on food prices.”
All that said, this is just one piece of good news among months and months of me saying, “Yo, your wallets are gonna think this sucks, haha.” Consumer price index is still up by 8.5% from a year ago, which is still an alarming statistic.
“There is a very long way to go before the Fed will feel it has sufficient compelling evidence that inflation is moderating to stop raising rates,” says Krishna Guha, head of the global policy and central bank strategy for Evercore ISI.
I guess what I’m saying is, enjoy it while you can. Prepare for the worst, hope for the best.
