US inflation cooled in June for the 12th straight month

https://www.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html

by gmays • 3 years ago

77 114 3 years ago

Inflation cooling: good for everybody. Families, businesses, etc. Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably.

Stock market reaction to inflation cooling: a little out of touch with reality at this point, and unfortunately only continuing to go in that direction.

Slightly related:

The concentration risk in the S&P 500 is currently higher than it was at the peak of the dot com bubble in 2000, with the top five stocks representing 23% of total market capitalisation. The combined market cap of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Nvidia (NVDA) now sits at $9.5trn, equivalent to 23% of the S&P 500's market cap. At the 2000 peak, the Microsoft, Cisco (CSCO), General Electric (GE), Walmart (WMT) and Intel (INTC) reached a combined market cap of $2.3trn, which represented 19% of the S&P 500 market cap.
The average price to sales ratio of the big 5 today is 6.8x, even higher than the 6.2x seen at the 2000 peak.
While earnings multiples are less extreme, with the big 5 trading at a collective PE ratio of 40x versus almost 60x for the big 5 in 2000. However, relative to the overall market the overvaluation is similar, with the big 5 today trading at a 100% premium to the S&P 500 as was the case in 2000.

https://seekingalpha.com/article/4616549-spy-concentration-r...

Don't get me wrong, I'm not a SeekingAlpha article type of person and I'm sorry for the link/slightly off-topic-ness but, man... those stats are so interesting to me. Not from a "oh my God, doomsday is here, bubble 2.0" but...

How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?

hackernewds• 3 years ago

tldr response, markets are forward looking. a lot of the downtrend of a recession have already been telegraphed a mile away with ample headway (good job Feds) and hence priced in.

MuffinFlavored7• 3 years ago

tldr response, markets are forward looking.

https://www.gurufocus.com/economic_indicators/6061/sp-500-pe...

Current market level: 4500

Current forward P/E ratio: ~19.9x

Previous market level: 3600 (October 2022)

Previous forward P/E ratio then: ~19.9x

So in 2022-10, EPS were $180

Now in 2023-06, EPS are $226

An increase in 25%, which basically matches the growth we've seen past 9 months

helen___keller• 3 years ago

401k/IRA

Don’t forget HSA

pc86• 3 years ago

You're right, this changes the calculus entirely!

Der_Einzige• 3 years ago

Generative AI is the gift that keeps on giving and it will counter the economic forces which are pushing tech companies away from being profitable. This is why stocks keep going up despite high interest rates.

Lol this struck a chord. Maybe folks here need to explain why generative AI isn’t a several trillion dollar industry and why it won’t positively impact stock prices for a ton of companies rather than just downvote.

blitzar5• 3 years ago

why generative AI isn’t a several trillion dollar industry

It is already.

MattGaiser2• 3 years ago

Or why AI isn’t going to become part of every product, service, and supply chain in the next decade.

green_man_lives• 3 years ago

I think that since you are making the claim that generative AI is propping up stocks, that the burden of proof is on you to explain why it is so useful. Right now you are just repeating a platitude that was already beaten to death by tech hype influencers.

I am not saying that you're wrong, but I think there is more uncertainty with AI than there is certainty. If you claim to be certain about something then the burden of proof is on you.

nostromo5• 3 years ago

Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably.

Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Inflation is still twice the target rate at 4%.

Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.

drexlspivey2• 3 years ago

More like the federal government causes massive problem and Fed comes to the rescue

HPsquared• 3 years ago

Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.

mediaman• 3 years ago

I think it's unfair to pin this on the Fed.

Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity.

Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing.

As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.

tekla• 3 years ago

"Firefighters cause massive water damage when fighting massive fire, news at 11"

MuffinFlavored7• 3 years ago

Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?

afterburner4• 3 years ago

Inflation is still twice the target rate at 4%

First of all, the article says inflation is at 3%.

Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd.

Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.

wayeq• 3 years ago

That's a pretty naive way to characterize the economic system, which is designed to include inflation in order to motivate participation in the economy. If you're hiding wads of cash in a suitcase under your bed, you either don't understand this or you've chosen to lock in reduced buying power year after year to avoid a greater loss due to a market collapse.

bryanlarsen3• 3 years ago

If the Fed and it's quantitative easing caused the problem, then you'd expect to see more inflation in countries with more easing and less in countries with less easing.

There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.

imtringued2• 3 years ago

Ah, yes, the classic "the Fed is supposed to micromanage everything".

Aren't neoclassicals supposed to deny the influence of money on the economy?

drewcoo• 3 years ago

You'd need a 22% raise to make up for the dollar only being worth $0.82.

.82 x 1.22 ~= 1

Or did I read that wrong?

fullshark2• 3 years ago

The next few years will be about ensuring the boomers can cash out their assets: 401k and houses. The government / federal reserve will not let the value of those drop substantially. After that and a generation is unable to buy a house or retire unless they inherited it from their parents, something will have to give.

lotsofpulp• 3 years ago

Why the next few years and not the foreseeable future when older people have more voting influence than younger people (due to both demographics and differences in voter participation rates)?

Also, payers of state/county/city taxes which eventually pay government employees with defined benefit pensions and retiree healthcare are also directly effected by lack of public equity performance since the savings for those deferred compensation plans are in the markets, and without the assumed investment returns, taxes would have to increase to make up the difference (and/or cuts to benefits).

Bottom line, assume the purchasing power of the USD will be trashed as much as needed/possible, so not being invested in the US public equity markets is a dicey proposition in my opinion.

sharedbeans• 3 years ago

Maybe, maybe not. Certainly price-to-sales ratio is not a relevant metric when tech companies are enormously profitable and have very high profit margins relative to many traditional companies. And IMO they still have lots of growth potential. Look at companies like Sony in Japan or Samsung in SK, they are basically conglomerates with multiple verticals: not just electronics but banking, insurance, entertainment, automotive. The big tech companies can (and are) expanding into these other areas.

Does that justify there current valuation? Again, maybe, maybe not, I’m not a stock analyst, but if you are just looking at a trailing P/E I don’t think that’s telling the whole story.

And the US market and economy is just structurally different from Europe and other economies. Massive energy abundance now to start with, and also work attitudes/culture. On the positive sides dynamism, willing to tolerate failure, new business formation, and on the (arguably I guess) negative side prioritization of work/profits over personal life and social welfare.

khuey• 3 years ago

If you're going to use P/E metrics it seems wrong to group AAPL, MSFT, and GOOGL with the likes of AMZN and NVDA when the latter have P/Es an order of magnitude higher than the former.

nostrademons5• 3 years ago

How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?

S&P 500 P/E is actually a stat that is tracked, and currently stands at about 26. I agree this makes no sense in the current interest rate environment. Investors are betting that rates are going to drop while corporate profits remain unchanged or corporate profits rise while rates remain unchanged, which also makes no sense, but at least the numbers are more reasonable than FAANG P/Es.

MuffinFlavored7• 3 years ago

https://news.ycombinator.com/item?id=36727617

Check my comment here and tell me what you think.

I agree with you, if I saw "current P/E 26x", I'd think "overbought, investing deemed risky" but if you check forward P/E instead of current P/E, it's unchanged in the past 9 months despite the 25% runup in SP500 price...

hattmall2• 3 years ago

It's not like 2000 because today it's the only game in town. If the money exist it must go somewhere. The US stock market is it. Real estate is equally if not more so over valued. Other markets are not attractive, emerging markets have lost appeal, and now even crypto is losing ground. The only serious threat is some sort of BRIC market alternative, but it's not even very serious.

The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration.

An engineered bust is pretty much the only way to prevent revolution. The existing and incoming inflation is really pushing the wealth divide and not just from the 1% to the 99%. But from those who hold assets to those who don't.

Right now, currently, the economic opportunities that were available as little as 10 years ago simply do not exist.

A median income job does not put you on a path to meaningful asset acquisition and may not even be enough to get most people out of student loan debt.

The other side of the equation with asset prices is household debt and it's sky high and these are generally opposite ends of the spectrum.

MuffinFlavored7• 3 years ago

The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration.

Can you expand on this please?

dpflan5• 3 years ago

I mean, wasn't there an "Inflation Reduction Act" passed ~1 year ago...seems pretty correlated? and no mention in the article?

mc32• 3 years ago

Ha, please don't take the names of Acts of Congress as truthful assertions. Spending, any spending increases inflation. One can ague some types of spending are necessary, but the names of Acts are often misnomers.

jondwillis• 3 years ago

“Immediate spending for dubious potential lower inflation in the future, probably, we hope, act” doesn’t have the same ring to it.

Side note, congress should be banned from adding biased names or acryonyms to bills. Just explain it. If the acronym spells something cute, try again.

laidoffamazon11• 3 years ago

The inflation reduction act reduces forward-looking government spending (which is why it was able to be passed via reconciliation) so this is incorrect.

AuryGlenz4• 3 years ago

As a matter of fact, you could probably take the inverse of the names and they’d be more truthful.

A massive spending bill to fight inflation nonsense. Increasing taxes would have helped. Stopping the student loan pause would have helped. Injecting more money into the economy? Not so much.

laidoffamazon11• 3 years ago

The factory building and infrastructure spending passed over the last two years is one of the reasons why the labor market has remained steady despite a higher federal funds rate.

dpflan5• 3 years ago

What’re you saying is the precise implication here?

room500• 3 years ago

The Inflation Reduction Act was a massive piece of legislation. I'm curious which pieces would have this short-term (< 1 year) deflationary impact.

My gut says that the Fed interest rates and natural cooling of the demand curve post-Covid-lockdown is more impactful. But I would love to learn more.

dpflan5• 3 years ago

I too would like to know, not entirely discount it like some are.

cwkoss3• 3 years ago

Food prices, rent, medical costs, education. I feel like all the expenses that disproportionately affect non-millionaires aren't cooling. Feels like corporations used inflation as cover to ratchet up prices and while inflation may have 'cooled' I get the feeling that those prices aren't going to readjust back down.

Getting increasingly expensive to be poor in this country.

blitzar5• 3 years ago

prices aren't going to readjust back down

That would be deflation.

Inflation of 10% means something that was $100 goes to $110, if inflation goes back to 1% for the next year that $100 thing will be $111.10 next year.

It always goes up ... and it compounds.

paxys• 3 years ago

Yeah I have no idea why people can't grasp this simple concept. Inflation could be 0% for the next decade and consumer prices still wouldn't go back to what they were in 2019. The only way to stay ahead is to ignore the absolute price of things and instead make sure your salary and investments are increasing at a higher rate than whatever the CPI number is.

cwkoss3• 3 years ago

I'm not talking about the supply chain costs of goods rising - from my view - corporations used inflation as cover to increase their profit margins and they are continuing to hold these high margins instead of going back to the competitive business as usual that we previously had.

A costco sized bag of potato chips is now $11. Systemic economic factors only account for a fraction of that price hike in my appraisal.

The idea that them dropping their price to a more reasonable $7 would be 'deflation' is overapplying economic theory terms. Pruning branches on one tree isn't deforestation.

I feel like there is a certain breed of capitalist who took econ 101 and is deluded into thinking any backpressure of corporate greed is risking a 'deflationary spiral'.

zmgsabst• 3 years ago

Inflation “cooling” means that prices are still going up, but more slowly.

Heating vs cooling of inflation is the acceleration, not the velocity of prices.

Invictus0• 3 years ago

That's what happens when you release a trillion in helicopter money

MattGaiser2• 3 years ago

Labour intensive goods in a world of ever more expensive labour and strong wage growth.

dghughes• 3 years ago

Same here in Canada. I'm single and making more than I even have but it seems most of it has been eaten away by inflation. I can't image how someone making minimum wage ($14.50/hour here) and most likely part-time is surviving. Average rent is $1,500/month and groceries seem to be climbing up in real-time as you watch the new e-paper prince displays.

matchbok• 3 years ago

There's 0 evidence of "greedlation". It takes only a minute to think why all these companies decided to collude and raise prices now and why not 5 years ago. Ten? Why now? Makes no sense. If they can do it now they would have done it years ago.

mitthrowaway2• 3 years ago

It takes only a minute to think why all these companies decided to collude and raise prices now and why not 5 years ago. Ten? Why now?

Corporate greed is mathematically synonymous with corporate non-competitiveness. Rather than dismissing this possibility a priori, maybe there are reasons why companies used to be more aggressive with their price competition, but aren't anymore?

One possibility that comes to my mind is a concentration of ownership in index funds, possibly interacting with rising interest rates at high stock valuations. If 40% of your voting shares are controlled by a fund manager who also controls 40% of your competitor (as well as the rest of the index), that will be a loud voice on your board pushing against cut-throat competition. He'll tell you, and your competitors across the index, that you all need to get your earnings up to protect your stock price because P/E ratios are falling amidst rising bond yields, and that the way to do this is for the whole index to increase prices until consumption starts to decline, where profits peak, rather than fighting with each other over market share.

cwkoss3• 3 years ago

They are doing it now because people will blame systemic economic factors rather than individual actors.

Makes a lot of sense to me.

Natsu• 3 years ago

Prices are still going up, just more slowly. That's the "cooling." It's just a happy face on the fact that we've had several years of awful inflation.

But inflation allows numbers to keep going up while hiding the fact that you can get less with those bigger numbers. People will be glad they're finally making $15/hr or $20/hr without realizing that it may not be as good as what they had before just because everything is more expensive.

Meanwhile, politicians can blame "greed" while ignoring that it's caused by them printing money as a way to deflect blame for the stealth taxes.

laidoffamazon11• 3 years ago

Wages are now growing faster than inflation in the country so this isn't really accurate. The poorest have seen the largest wage growth even during the high inflation periods last year.

alfalfasprout2• 3 years ago

The poorest, sure. The majority of americans are still net losers in all of this. Keep in mind their wages were also stagnant for a long period of time.

henriquez• 3 years ago

That's just what they want you to think.

lend0004• 3 years ago

While inflation may be decreasing, keep in mind that reported CPI numbers have consistently under-represented inflation since at least the early 1980's.

This chart demonstrates the inaccuracy concisely: [0].

According to FRED, the median worker should be living much more comfortably now than at previous times in recent history, when a median worker could, you know, buy a house with a yard, support a family, and retire. All because of some fundamental errors in how CPI is calculated that the government has no incentive to fix (combined with fundamental errors in how (un)employment is measured, but that's a different issue).

[0] https://fred.stlouisfed.org/series/LES1252881600Q

laidoffamazon11• 3 years ago

Your evidence for stating that CPI is under-represented is showing that median real earnings are up at a historically high level (save for composition driven Q2 2020)? The facts aren't really relevant to your feelings here, they're showing the opposite - Americans are richer and make more money than almost any time in history.

fhars• 3 years ago

That graph illustrates the "should be living much more comfortably now" part of their argument, which is that the CPI adjustment used in that graph is deceptive. You are literally trying to twist their words into the opposite meaning to score a quick win.

rcme3• 3 years ago

No, you're misinterpretating what the GP said. The linked Fed graph is showing that the median real earnings are at an all-time high. But how can that be true? Median workers in the past could easily afford health care, a house, and education. But they no longer can, so clearly the Fed's calculation of CPI does not accurately reflect reality.

And I agree with this. When we talk about "inflation adjusted", we need a benchmark to compare the value of dollars across time. Typically CPI is used, but it has major issues. One major issue for the "median worker" is that real estate values are not included. Obviously many workers want to buy a house to live in so this is a glaring omission. Similarly, things like stock values are not included, even though the value of equities has a massive impact on a dollar's buying power. E.g. if consumer prices at time A and B are the same, but the value of GOOG is X at time A and 2X at time B, doesn't the dollar at time A has more buying power than at time B? Finally, CPI heavily weights things like consumer electronics and automobile. These are important, but people buy these things once in a blue moon and movement in these prices generally doesn't impact people that much.

lend0004• 3 years ago

You seem to have missed the point -- I'm saying that only one of the two viewpoints can be true, because they are logically inconsistent, according to real wages. Where the two options are that CPI is accurate, and median standards of living have not improved, viewpoints that often seem to be held in tandem.

Since there is other evidence against the accuracy of CPI, and also evidence that Americans are not enjoying a higher standard of living, I'm confident that the first one is not true (CPI does NOT accurately represent inflation).

pirate787• 3 years ago

On the demand side, we've added over 100 million people to the U.S. population since 1980.

ameister14• 3 years ago

There's actually a potential issue here - the money supply is contracting, which yes results in lower inflation but also is really, really unstable and could result in serious issues for the economy if the labor market weakens any significant amount.

alfalfasprout2• 3 years ago

Presumably the fed can pivot the other way when needed. That's also a big reason they want to tamper down inflation as quickly as possible while not breaking everything. It gives them more wiggle room to reduce rates when needed without triggering high inflation again.

imtringued2• 3 years ago

Just tax people for being indecisive and delaying their decision making.

I know this is an unpopular proposal even though mathematically it works and is simple to implement.

no_wizard• 3 years ago

When do we get to see real deflation now? I am looking forward to negative inflation, let some band of value be "cut" so prices can come down on assets more aggressively

AuryGlenz4• 3 years ago

Deflation is a bad thing as it can spiral out of co trip quickly. If we even approach it be prepared for the fed and government to do everything they can to stop it.

US inflation cooled in June for the 12th straight month

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