The Inflation Issue Isn’t Transitory

Freedom Financial Archive | Originally posted Sep 28, 2022

Inflation remains rampant worldwide, with more pressure coming throughout the supply chain.

U.S. core services CPI surged again with more pressure coming from the rent of primary residence.

The shift in primary and owner equivalent rents saw the biggest surge in 15 years.

But there is more to come when you look at the lag between the CPI value and the current breakdown.

The year-on-year price appreciation remains well into the upper teens and will stay there throughout Q2 and most likely Q3 of this year.

But the shift in mortgage rates has caused mortgage payments to have an unprecedented run higher.

When we put that mortgage payment scale into perspective over the last 22 years, you get an idea of why this is such a huge jump.

It hits hard when you look at the value of homes as people will struggle to manage those payments, which has caused buyers to purchase smaller houses.

The housing market has just started to slow down from all-time highs, but we expect that downward move to accelerate as rates increase.

The leading indicators on the US Pending Home Sales Index have started to show the cracks.

We had the “normal” seasonal jump.

But the rate of change was slower, with the top being well below the flows of other years.

Given the pain in the market, it isn’t surprising to see Americans worried about their financial conditions.

The pressure is mounting on consumers as they have turned back to credit cards and other borrowings to maintain their living conditions.

But, when we look at the ability to “maintain the standard of living,” 52% of people are worried they won’t be able to do it.

When we look at the shift in real disposable income, consumers are probably right that issues will only keep worsening.

The consumer has less buying power, and given the current shifts in the market around supply chains and diesel, it will only worsen.

Here is an updated chart based on the newest data on CPI and real wages.

Real wages keep falling around the world, and it gets even worse when you account for inflation.

Inflation spiked again in Canada, the EU, and the UK, driving down disposable income.

The buying power of consumers is now well below 0 and is in negative territory, between -0.5% to -4.0% and falling. We expect things in Europe to get worse than in the rest of the world.

The cost-of-living crisis is far worse in Europe… and the pain is only growing.

When we turn to India, inflation is becoming an even bigger issue as the cost of living keeps shifting higher with more pressure to the upside.

India’s inflation soared further above the Reserve Bank of India’s target range in April, driven by a broad-based increase in the cost of food, fuel, and core goods and services.

The reading will likely elicit another steep rate rise by the RBI at its June review after a surprise hike in an out-of-turn decision on May 4.

By the end of the third quarter, the central bank will almost certainly have failed on its mandate to keep average inflation below 6% for three consecutive quarters.

Inflation increased to 7.79% year on year in April from 6.95% in March — marking a fourth month above the 6% ceiling of the central bank’s target range.

The reading beat our forecast of 7.3% and the median consensus estimate of 7.4%.

When we look at the breakdown of the inflation data, it was broad-based with a lot of momentum behind it.

I expected to see inflation at around 7%.

But instead, it surged higher with a lot of staying power above the 7% figure.

Given the global pricing rise, it isn’t surprising to see such a significant increase in food and fuel prices.

We see crude prices as being range bound, but the shortage in diesel continues to drive up global costs.

But even when you exclude food and fuel to get “core inflation,”: it advanced to 6.4% in April from 6% in March.

The estimates for food pricing this month are so far topping estimates and will keep pressure on the inflation data.

We will get a minor pullback.

But there is more than enough to keep it well above 7% and force the RBI to retake action.

The demand for refined product in India rose, showing some additional activity across the local economy:

India’s oil-product consumption in April rose 12% y/y, up the most since April 2021, to 18.6 million tons, according to provisional data published by the oil ministry’s Petroleum Planning & Analysis Cell:

  • Gasoline consumption was at 2.8 million tons, +17% y/y, up the most since April 2021
  • Diesel consumption was at 7.2 million tons, +7.9% y/y, up the most since August
  • Naphtha consumption was at 1.06 million tons, -14% y/y, down the most since January 2021
  • LPG consumption +2.4% y/y to 2.16 million tons
  • Petcoke consumption +18% y/y to 1.17 million tons

The shortage in diesel on a global level is keeping prices elevated.

And it’s making the problem worse inside India.

Because there is a lot of sticking power to Indian inflation, we expect another increase in local interest rates.

This will increase the cost of borrowing for the government and local businesses.

The government is still running a deficit.

And between the USD spiking/US 10-year/local rates… the price of borrowing is going up hard.

As inflation hits, it’s essential to look at where the U.S. imports many goods.

China is number 1, and India is number 8.

And as their costs rise, the companies look to pass through the increases through pricing.

The U.S. will continue to import inflation from around the world, keeping our living expenses elevated.

We don’t see a significant drop in U.S. inflation.  And for anyone that has been to the store… you have only seen things move in one direction.

Freedom Financial News