From Inflation to Deflation: A Seasonal Shift in Consumer Prices

Consumers tapped out from inflation may finally get a reprieve this holiday season in the form of falling prices. According to Walmart CEO Doug McMillon, deflation could be on the horizon.

On a Thursday earnings call, McMillon said the retail giant expects to see deflationary trends emerge in the coming weeks and months. He pointed to general merchandise and key grocery items like eggs, chicken, and seafood that have already seen notable price decreases.

McMillon added that even stubbornly high prices for pantry staples are expected to start dropping soon. “In the U.S., we may be managing through a period of deflation in the months to come,” he said, welcoming the change as a benefit to financially strapped customers.

His comments echo optimism from other major retailers that inflation may have peaked. Earlier this week, Home Depot CFO Richard McPhail remarked that “the worst of the inflationary environment is behind us.”

Government data also hints the pricing pressures are easing. The consumer price index (CPI) for October was flat compared to September on a seasonally adjusted basis. Core CPI, which excludes volatile food and energy costs, dipped to a two-year low.

This emerging deflationary environment is a reprieve after over a year of runaway inflation that drove the cost of living to 40-year highs. Everything from groceries to household utilities saw dramatic price hikes that squeezed family budgets.

But the October CPI readings suggest the Federal Reserve’s aggressive interest rate hikes are having the desired effect of reining in excessive inflation. As supply chains normalize and consumer demand cools, prices are softening across many categories.

For instance, the American Farm Bureau Federation calculates that the average cost of a classic Thanksgiving dinner for 10 will be $64.05 this year – down 4.5% from 2022’s record high of $67.01. The drop is attributed largely to a decrease in turkey prices.

Still, consumers aren’t out of the woods yet when it comes to stubborn inflation on essentials. While prices are down from their peak, they remain elevated compared to historical norms.

Grocery prices at Walmart are up mid-single digits versus 2022, though up high-teens compared to 2019. Many other household basics like rent, medical care, and vehicle insurance continue to rise at above average rates.

And American shopping habits reflect the impact of lingering inflation. Walmart CFO John David Rainey noted consumers have waited for discounts before purchasing goods such as Black Friday deals.

McMillon indicated shoppers are still monitoring spending carefully. So while deflationary pressure is a tailwind, Walmart doesn’t expect an abrupt return to pre-pandemic spending patterns.

The retailer hopes to see food prices in particular come down faster, as grocery inflation eats up a significant chunk of household budgets. But experts warn it could take the rest of 2023 before inflation fully normalizes.

Consumers have been resilient yet cautious under economic uncertainty. If deflation takes root across the retail landscape, it could provide much-needed relief to wallets and mark a turning point toward recovery. For now, the environment looks favorable for a little more jingle in shoppers’ pockets this holiday season.

Cathie Wood Believes the Fed is Playing Economic Jenga

Ark Invest Warns of a Deflationary Ripple that Could Spread Around the Globe

Pricing, whether it be of the stock market, private placements, or other alternative investments is impacted by investor demand, and demand is the result of differing views. Cathie Wood, the Ark Investment Management CEO, has held the view that the U.S. and global economies are close to a deflationary spiral. She pointed to more evidence this week, and sounded the alarm for the potential dire consequences of the Federal Reserve’s ongoing rate tightening measures. According to Wood, deflation tied to China and actions by the U.S. central bank could set off a chain reaction of deflation-induced economic slowdowns, not just within the United States but across international markets.

Source @CathieDWood (X, August 14, 2023)

Ms. Wood, the 67-year-old market veteran, who falls in the category of celebrity investor, has many fans and followers. She shared her concerns in a string of posts on X, the platform formerly known as Twitter. Wood stated, “China is exporting deflation in a more profound way than I believe many economists and strategists appreciate.”

She explained that producer prices in China, the world’s second largest economy, were impacted by the U.S. dollar strengthening by 15% against the Chinese yuan, despite the devaluation adding around 15% to Chinese PPI, the Chinese reported a decline in the PPI inflation measure by 4%.

Source @CathieDWood (X, August 14, 2023)

Wood expressed China is exporting deflation. She posted that, under normal circumstances, the 15% depreciation of the yuan against the dollar in 2022 should have led to a 15% increase in China’s annual producer inflation rate. Since it instead dropped 4%, In her math, this is creating near a 20% downdraft on prices of Chinese goods.

Source @CathieDWood (X, August 14, 2023)

Turning her focus to China’s economic trajectory, Wood recounted the country’s impressive growth following its entry into the World Trade Organization in 2001. Over nearly two decades, China’s real GDP experienced a sustained double-digit expansion. However, Wood pointed out that rapid growth often conceals underlying economic vulnerabilities, including excessive debt and leverage. Her firm believes these vulnerabilities are now creating cracks in China’s economy.

Source @CathieDWood (X, August 14, 2023)

Wood suggested that China might attempt to halt the depreciation of the yuan. However, this would necessitate selling off U.S. dollars and acquiring yuan, which, in turn, tightens monetary policy and fuels the economy’s fragility, even amid efforts to stimulate it.

Source @CathieDWood (X, August 14, 2023)

Ark Invest’s CEO posted, “The Fed has precipitated and exacerbated the risk of a global deflationary bust.” Drawing attention to the central bank’s remarkable 22-fold increase in the Fed funds rate, Wood warned that the repercussions of this move would first impact China and subsequently ripple through the rest of the world.

Recent economic data from China underscores the challenges it currently faces. Second-quarter GDP growth came in at 6.3%, falling short of the 7.3% projection by economists. Furthermore, new bank loans for July plummeted by 89% month-over-month, marking the lowest level since 2009, according to data from the People’s Bank of China.

The deflationary trend is evident in inflation figures as well. July inflation data showed both consumer and producer price inflation rates in negative territory.

Adding to the concerns, a trio of data released from the China National Bureau of Statistics revealed lackluster performance. Retail sales rose by a modest 2.5% year-over-year in July, well below the anticipated 4.5% increase. Industrial Production also lagged, with a 3.7% rise compared to the consensus estimate of 4.4%. Moreover, fixed asset investment figures raised further questions about the country’s economic health.

Take Away

There are certainly competing inflation forecasts opposing those coming out of Cathie Wood’s firm. However, her warnings do serve as a reminder, from a veteran in the asset management business, of the interconnectedness of global economies and the potential ramifications of central bank policy decisions. As markets continue to navigate the crosscurrents, attention remains on policymakers and economic indicators for signs of any change in trends.

Paul Hoffman

Managing Editor, Channelchek

Sources

Cathie Wood’s X Post

http://www.stats.gov.cn/english/PressRelease/202308/t20230815_1942019.html