“The “reacceleration of inflation” suggests “the Fed cannot totally shift its focus away from its inflation target.”
By Wolf Richter for WOLF STREET.
Underlying inflationary dynamics are picking up steam, after having cooled a lot. Today, S&P’s preliminary Flash US Composite PMI (Purchasing Manager Index), based on data collected from September 12 through 20, entailed multiple warnings about the Fed’s future rate cuts, in light of reaccelerating selling-price inflation in both the services and manufacturing sectors, and in light of input-cost inflation in services.
The price gauges of the PMIs “serve as a warning” that “the FOMC may need to move cautiously in implementing further rate cuts,” the report said. We’ve already seen the second month-to-month re-acceleration in a row of CPI inflation.
Overall, “business activity growth remained robust in September,” the PMI report said. The flash Composite PMI, which combines services and manufacturing PMIs, came in at 54.4 in September, indicating solid growth (above 50 = growth compared to the prior month). With July and August also showing solid growth, September is “rounding off the strongest quarter since the first three months of 2022.”
The Composite PMI was driven by strong growth in services, which make up the majority of the economy, and “modestly falling output” in the manufacturing sector.
Continued divergence between services and manufacturing.
The S&P’s Flash Services PMI for August came in a 55.4, meaning growth at a “solid pace,” with “the rate of increase running at the second-highest seen over the past 29 months.” The Services PMI has shown roughly the same pace of solid growth for the past five months. Services are the majority of the economy, and they carry it.
Manufacturing, which accounts for a much smaller part of the economy and employment, has been in the doldrums coming off the phenomenal spike during the pandemic. For September, the flash Manufacturing PMI ticked down “modestly” to a 15-month low of 47 (below 50 = contraction compared to the prior month).
Inflation dynamics entail a warning to the Fed about rate cuts.
“Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year,” the report said.
“The “reacceleration of inflation” suggests that “the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn,” the report said.
“The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts,” the report said.
Selling price inflation in both, services and manufacturing: “Prices charged rose at the fastest rate for six months, pushed higher by input cost growth accelerating to a one-year high,” it said.
“The acceleration of selling price inflation was common across goods [manufacturing] and services, in both cases hitting six-month highs,” and “in both cases running above pre-pandemic long-run averages to point to elevated rates of increase,” it said.
Input cost inflation: services diverge from manufacturing. “Service sector input cost growth notably struck a 12-month high, linked to reports of wage growth,” it said.
“Higher charges were driven by increased costs, with input costs rising at fastest pace for a year in September,” and it was “often linked to the need to raise pay rates for staff,” it said.
“In contrast, manufacturing input cost growth cooled to a six-month low thanks to lower energy prices and fewer supply chain price pressures,” it said.
How the PMIs work. They are based on surveys of a panel of company executives that get the survey each month.
A value = 50 means that there was no change in the current month from the prior month: the number of respondents who said there was growth equals the number of respondents who said there was a decline, and the rest said there was no change.
A value higher than 50 means that more respondents said there was growth than said there was decline, and the rest said there was no change, in the current month from the prior month.
Conversely, a value below 50 means decline. The distanced from 50 indicates the pace of growth or contraction in the current month from the prior month.
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After a 30%-40% increases in goods prices over just a few short years, good prices are *expected* to fall several percentage points, so should be ignored. On the other hand, services prices are soaring where they are *not expected* to soar, and are a genuine problem.
Goods are not up 30-40% in a few years, at least not in my experience. They’re either flat or down.
Just lucky that the oil prices are low these days.
And Nat Gas.
Uranium stocks and Green energy stocks have had a tough year too.
Green energy suffered because of high interest rates which caused consumers / businesses to cut back on buying solar panels because those purchases are usually financed purchases.
I did see some solid increases in car and home insurance but at the same time they went for 5+ years with no increases, although some of that might expected with auto since car depreciates in value.
My health insurance premiums have always increased more but being I pay only 20% and my employee pays 80% those go less noticed. I will be paying closer attention when I renew next year. My insurer does do well but if anyone’s expectation is they won’t charge as much as possible then they haven’t been paying attention. Climate change and severe weather events have impacted them as well. Not long before tax payers will have to greatly subsidize people for living where they shouldn’t or should simply accept that risk.
I rent and live on a fixed income. So the last few years have seen my expenses increase. The fed needs to keep its eye on inflation. Cities also need to reform their zoning laws so more housing can be built. Powell is correct to say housing and rental inflation are primarily a supply problem and are not going to solved by rate cuts.
The only people that want more houses built are those people without houses.
I suspect people seeing their property taxes/insurance rates go up massively due to housing price inflation that has no utility to them unless they take profits (which, if it happens across the country, would erode any paper gains) may have a different opinion if they thought rationally about their financial strategy.
Yeah, imagine that. People hoarding houses they’re not living in don’t care if they’re sold.
Well sure. And the people who do not want more houses are those who already have houses. Strict zoning is a government action that restricts the amount of housing. This favors those of who already have, who are older and richer, and burdens those who do not have, who are generally younger and less well off. So a government program that makes the (relatively) rich richer and makes the (relatively) poor poorer. Take from poor and give to the rich. Is this good government policy?
And don’t forget that our current strict zoning only began in earnest during the 60s to oppose the new fair housing laws. For most of US history as a city’s population grow, more housing was built: single family houses turned into multiplexes and later turned into high rises. (See the older parts of most US cities.)
This a hilarious comment. Was it meant to be?
How many homes sit empty? How many are STRs (not just official numbers, but everything under the radar/not reported legally?) We didn’t see 30-40% population growth in three years, nor did 30-40% of the population suddenly need a home they didn’t the year before. The sudden massive increase in prices and bidding wars was the result of something else. You can certainly say it’s a supply problem in the sense that there weren’t unlimited homes to purchase, so the sudden massive increase in demand wasn’t readily absorbed, but this was not gradual like one would expect to see in a simple scenario of reduced supply.
The asset price inflation in housing isn’t simple; I think a lot of demand was pulled forward and investing in housing portfolios became trendy, and the shift to everybody becoming a landlord (normally it’s sell your home/buy another – net 0 on inventory; with many people now opting to keep their old home and just rent it out, this dynamic changed).
The next few years are going to be interesting.
Vacant houses are coming out of the woodwork for all to see… We went hiking yesterday on Mount Tam (about 30 minutes from San Francisco). From 101 (expressway across GG Bridge), exit at Hwy 1, which then winds up the mountain, then Panoramic Hwy along the ridge. So this is in Marin County, a high-dollar bedroom community for San Francisco and the Bay Area. On that stretch of Hwy 1 and the Panoramic Hwy, there were a whole bunch of for-sale signs, when there are normally none. Next time I’m going to count them.
@David STRs sit “empty” a lot less than most “vacation homes” that are not rented (and some STRs that are rented agressively sit “empty” less than the typical American family home that sits “empty” M-F for about 8 hours a day)
There is no doubt that STRs caused “some” of the price inflation in “some” markets, but what I have seen as the “main” driver of price inflation (in this RE bubble and the recent Rolex and Used Porsche 911 bubbles) is a period of continued price inflation gets more and more people to “jump in” and overpay.
I believe that the “biggest” driver of the last (2000-2005) RE bubble (then bubble pop) were the “liar loans” that allowed more people to get in and buy what they could not afford while the “biggest” driver of the most recent 2012-2022 RE bubble was inflation like in the 70’s where the price of most RE (and Rolexes and used 911s) doubled but never dropped much from market peak as inflation kept pushing values higher.
The minimum wage for a guy working at McDonalds in CA was $8/hr ~$16K/year in 2012, it is now $20/yr ~$40K year. In 2012 there were still some guys painting apartments for $20/hr, today it it hard to find anyone to do any work at an apartment for less than $50/hr. As inflation continues to push wages higher the price of everything will go higher (including the price of real estate).
What’s the basis for 30-40%?
It doesn’t take a significant rise in demand vs supply to raise prices a lot. Low interest rates added fuel to the fire but it’s been known for a long time that house building has been lagging
“Powell is correct to say housing and rental inflation are primarily a supply problem and are not going to solved by rate cuts.”
Keep drinking the Kool-Aid. Supply problems…sorry, that’s a fairy tale. How about Powell say the US ‘people-in-charge’ are letting in hundreds of thousands of illegal immigrants, flooding our country and
putting massive strain on city and state governments and making housing supply tighter than it should be. Oh, and Mr. Jay, for the increased price of housing -look in the mirror to see who’s responsible. LOOK IN THE MIRROR.
The population growth in the US is 0.5% per year.
Without immigration, it would be shrinking like Japan.
Quick! – Raise the rates! Save us from inflation!
“Danger Will Robinson” says the robot Flapping his arms back and forth “danger.”
Dr Smith appears…no need to worry “Will”my boy.
Well I’m starting to worry, can’t even make it a week after lowering rates before the robot goes off.
Not surprised. I think inflation is bottomed and most likely creep up from here. Many consumers also ignore the rates when buying. High rates have a strong downward affect inflation. And they are going down.
There is too much bull pressure on the asset prices, which reflects on the service inflation. The current pace and magnitude of QT cannot overcome this pressure. There is also currency devaluation due to the budget deficit moving towards infinity.
I wished the presidential debates would focus on reducing this budget deficit and giving people with fixed income some relief. But it is not something that can even be dreamed of.
Everyone lives on a fixed income.
Duh. The second wave of inflation is coming and it has been made much worse through continued deficit spending and the reindeer games of that gnome at the treasury as well as the wizard at The Fed. Unlike the 70’s/80’s however the national DEBT will be a problem this time around…
Hedge accordingly.
You’d have to count O/N RRPs high of 2022-12-30 $2553.716, and its drawdown to 2024-09-23 $380.372 as a mechanism to extend economic growth.
Cut o/n rate. Cut c/c rate by half so small businesses can borrow and thrive. Lower rates==> higher vol, lower delinquencies, less zombie accounts. The banks will thrive. Prosperity lift all workers. Higher GDP. Higher productivity. Gov debt will be cut by inflation and surpluses. There will be a shift from a service economy to producing real goods, real stuff.
LOL!!!
Great sarcasm! Nicely done!