Consumer Prices Jumped 1% Last Month and Are Up 8.6% Over Last Year… Inflation came in hotter than expected and reached the highest level since December 1981.
What it means— Base effect? What base effect? Expecting rising prices last year to offset inflation last month was an error. Every category appears to have moved higher, with even used car prices making a U-turn and moving up after dropping for three months. Fuel oil led the way, up 16.9% for the month and 106.7% for the year, the largest increase in recorded history, back to 1935. But fuel oil expenditures account for a mere 0.165% of expenses for the average family. Gasoline, which makes up 4.5% of our budgets, cost 4.1% more in May and 48% more over the last year.
Don’t forget shelter. The numbers for housing appear modest, at 0.6% higher for last month and 5.5% over the last year, but they pack a punch, at about 33% of the average budget. The inflation numbers put the Fed in between the rock of inflation and the hard place of recession. As inflation soars higher, the chance for a recession also increases, because GDP growth is measured in real terms. This brings us all the way back to something we’ve discussed for about a year… stagflation.
European Central Bank (ECB) Agrees to Raise Rates in July, the First Time in 11 Years… The central bank noted that it will end its bond-buying program next month as well.
What it means— There’s a lot less to this policy change than it seems. At present, the ECB overnight interest rate is -0.50% .. the central bank charges large depositors half a percentage point. By “raising” rates next month, the ECB will charge large depositors a smaller amount, 0.25%. The bankers noted that they could have interest rates at zero by September. Let’s hope they don’t hurt themselves by moving so fast. ECB President Christine Lagarde cited 8.1% inflation in the eurozone as the major reason for tightening monetary policy, which is unfortunate.
Easy monetary policy didn’t create inflation across Europe and, unlike in the U.S., neither did profligate fiscal policy. It’s not like the Europeans are rushing out to buy a bunch of stuff they don’t need. They are suffering with imported inflation, as Russia holds them hostage in the areas of energy and food. The Europeans are paying dramatically more for both.
Raising rates, which is meant to destroy demand, will just make a bad situation worse. Or, rather, it would make things worse if raising the overnight rate from -0.50% to -0.25% meant anything to the average consumer. Until the ECB raises rates into positive territory, this remains more a game of psychology than anything else. The bankers are trying to convince the public that they will be tough on inflation even as they take baby steps toward tightening monetary policy.
Target and Other Retailers Hold Excess Inventory… Target, Walmart, and even Amazon noted that changing consumer habits left the retailers with excess inventory, which likely will be liquidated through markdowns.
What it means— Retailers, their investors, and their clients must pick their poison. For years we’ve lived in a just-in-time world where retailers held modest amounts of inventory and changed their orders on the fly. Suppliers, mostly in China, adjusted in real time. The system keeps prices low and fresh goods on the shelves, but it leaves retailers open to supply chain disruptions such as those we had with COVID.
To guard against more empty shelves from a future supply chain issue, retailers stocked up last year on what they thought we might want. They were wrong. Now they must move the unwanted goods at lower prices, which will hurt earnings. Just as with risk-taking in the financial markets, retailers likely will be more cautious for a while, holding higher levels of inventory to guard against disruptions, until we have several years of calm. Then they’ll ease back toward just-in-time inventory methods to increase profits and more closely match consumer demand as the last global disruption memories fade.
January 6 Capitol Riot Hearings Go Prime Time… The House committee investigating the events began holding hearings during prime-time television viewing on Thursday evening.
What it means— It’s probably purely coincidence, but the television spectacle is taking place in the months leading up to the mid-term elections. With President Biden’s approval rating hovering near 40% and the “Stop the Steal” movement still holding ground among the American electorate, House Democrats look like they’re trying to gain some traction as the elections get closer. Since the events of January 6 weren’t covert, it’s unlikely that anything revealed during the hearings will change anyone’s mind. With so many other viewing options available, like Netflix, Disney+, Amazon Prime Video, and Apple TV+, coordinated coverage on eight networks generated nearly twenty million viewers who tuned in to the proceedings.
Woman Wins $5.2 Million Judgment Against GEICO Because She Contracted STD in Car… A woman filed a claim against auto insurer GEICO because she contracted human papillomavirus (HPV) from her ex-boyfriend, a GEICO client, in his car. GEICO denied the claim, which she then pursued in arbitration. The arbitration panel awarded her $5.2 million. GEICO sued in state court to have the judgment thrown out but was rejected. Now GEICO is suing in federal court, claiming the action or events that led to the infection and the claim aren’t covered under the auto insurance policy. DUH!
Data supplied by HS Dent Research
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