Weekly Newsletter – February 15, 2024 – Inflated Inflation

This week, we have seen more economic data coming from various companies and countries, all pointing to slower economic horizons except for the US CPI, which came in higher than expected. This seems surprising. The data from Japan and the UK, the 3rd and 6th largest economies globally, along with the weakening of China’s economy, surely represents the global slowdown.

This morning, Canadian Tire, a hallmark of domestic consumer purchasing, announced poor results reflecting the deterioration in consumer purchasing power. But this phenomenon does not appear to be happening in the US, as reflected by the CPI and the latest GDP data. I think we need to dig a bit deeper.

PCE (Personal Consumption Expenditures), also known as consumer spending, is a measure of the spending on goods and services by individuals. PCE accounts for about two-thirds of domestic spending. The latest report that was published on PCE was in December, showing a 0.2% month-over-month increase and an annual rate of 2.6%, far below the latest CPI data of 0.3% month-over-month and 3.9% annualized.

The latest CPI data showed that shelter costs rose 0.6% month-over-month, contributing two-thirds of the total monthly increase, while energy costs dropped. Let’s go back to shelter. At the beginning of each month, all households have a bucket full of money, hopefully where bills are paid. The bucket only gets filled up more when there are wage gains, but wage gains have not kept up with inflation. So if housing and shelter costs continue to take more money from that bucket, then there must be less money left over for other personal goods and services. The only other way to fill that bucket is through increased debt, which is not ideal.

So, it is confounding how the US continues to show such strong CPI data when we already know that their largest trading partners are slowing, unless they have created a moat that protects them from global trade patterns - or maybe it is from all of the government spending and new government hiring versus the private sector, which is showing signs of slowing. Adding the slowdown in retail sales this month (negative 0.8% month-over-month versus negative 0.1%) and slowing new home construction, it appears as if the moat has finally broken and government spending can only go for so long - at the end of 2023, US government debt was 124.2% of GDP versus only 105% prior to the pandemic. How long can the government keep propping up the economy is hard to predict, but it appears as if the end is near.

Have a very nice Family Day Weekend!