Michael Huber - Associate Investment Analyst, CBIZ Investment Advisory Services
Inflation has been cooling down while a soft-landing narrative has become louder each week over the past couple of months. There is no certainty one way or another on the outlook for inflation as conflicting headlines ebb and flow each day. These sentiment movements may have told us just how sticky inflation will be going forward. Just 3 years ago, supply chain pressure dramatically impacted shipping everywhere. New cars seemed impossible to get in a timely fashion on top of many other semiconductor and labor-intensive products such as furniture, appliances, etc. The following chart contains data collected by the St. Louis Fed and shows the drastic drop in car inventories following the start of the pandemic.
Much of the supply chain issues, exacerbated by the pandemic lockdowns, were attributed to just in time manufacturing (aka “lean manufacturing”) which was adopted by the US in the 1980’s after Toyota utilized this method for some time in Japan. Around this same time in the US, globalization had an impact on the dynamics of the supply chain. Both concepts have come under scrutiny in the wake of the pandemic.
In the summer of 2022, The San Francisco Fed wrote a paper that blamed 60% of inflation on supply chain issues. In this study, PCE was broken down into Demand driven, supply driven, and ambiguous (shockingly accounted for quite a bit following the start of the pandemic). While some charts may say this, supply chain constraints have been eased for some time now and should continue to stay quiet for the time being as so many, including a new White House Council on Supply Chain Resilience, have made a point to not lose track of pressures. In fact, the Global Supply Chain Pressure Index hit a 25 year low in May. Just before those focused on this component of inflation could celebrate, pressures have ticked up as shown by the most recent numbers.
Stimulus was thought to be another driver of inflation following the pandemic. Almost half of those in the US received some form of covid stimulus. Of those surveyed following the first disbursement, about a third of the stimulus went towards discretionary spending or savings. This seems like a rather high number considering these were “emergency funds” for those who qualified. It was here that consumer spending behavior showed the first signs of shifting. When things opened back up fully, there wasn’t just an uptick in travel and leisure spending, it seems more like a permanent willingness to spend more on like activities/experiences. This is shown below with more data collected by the St. Louis Fed.
What allowed people to spend more on leisure/experience were the raises in wages that we saw over the past couple of years. Except for a few months at the end of 2021/start of 2022, wages outpaced inflation during the most recent inflationary period. When comparing wage growth to core CPI, employees appear even happier. The hybrid work atmosphere provided an easier path to longer vacations while avoiding some traffic along the way.
With rates raised to what seems like the peak of this cycle, there is still some evidence needed for the Fed to make the next call and start cutting. In more recent times, the outlook on inflation has been generally optimistic as the labor market has started to show signs of weakness as well as headline inflation numbers. However, Core inflation numbers (ex. energy and food) look far stickier, and wages are still holding on. Contrary to these inflationary signs, existing home sales have been falling rapidly (no shock with mortgage rates so high) and our imports from China have been on the up and up since before the pandemic (this points to the fact that we are importing deflation to some extent).
It is important to remember that the Fed hiked rates quickly, but this doesn’t necessarily mean that a result is to be had just as quickly. A lot of dynamics helped to spur inflation to 40-year highs. Even the Fed’s careful methodology requires some patience.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.
 U.S. Bureau of Economic Analysis, Domestic Auto Inventories [AUINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/AUINSA, December 12, 2023.
 Federal Reserve Bank of New York, Global Supply Chain Pressure Index, https://www.newyorkfed.org/research/policy/gscpi.
 U.S. Census Bureau, Total Revenue for Traveler Accommodation, Establishments Subject to Federal Income Tax [REV7211TAXABL144QNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/REV7211TAXABL144QNSA, December 21, 2023.