Inflation Better Than Expected, Worse Than it Looks

Week in Review: July 10-14

This week was all about the inflation data on Wednesday but also gave us updates on small business owner optimism, inflation-adjusted wages, consumer sentiment, and more.

Monday

New York Fed Survey of Consumer Expectations

Inflation expectations for the next year fell to 3.8%, the lowest level since April 2021. To the extent you think consumers are accurate forecasters, this is good. Less good: 5-year inflation expectations increased to 3.0%, the highest level since March 2022. I don’t put much faith in anyone predicting inflation in 2028, so I wouldn’t worry too much about long range expectations.

The median expected home price change increased to 2.9% (that’s per year) in June, the highest since last July. On average, respondents put about a 15% chance on them moving over the next year, which is a bit lower than the pre-pandemic level and, frankly, seems optimistic with mortgage rates near 7%.

The mean probability of not being able to make minimum debt payments over the next three months increased to 12% in June. That’s up from 10.6% in April but is actually pretty low by pre-pandemic standards.

Maybe the most interesting finding in the survey: respondents put the mean probability that stock prices will be higher one year from now at 35.3%. That by itself doesn’t sound so outlandish, but since the start of the survey in June 2013, that probability has only been above 50% in one month: April 2020. To give context to how wrong and overly pessimistic this is, the S&P 500 has been up on a yearly basis in 80% of months since the start of 2014.

Gas Prices

Gas prices increased for the first time in a month, up $0.02 for the week but still down about $1.09 over the past year.

TSA Checkpoint Travel Numbers

The number of people passing through TSA security during the week ending July 10^th was slightly lower than during the same week in 2019, but that’s got something to do because of how the July 4^th holiday fell relative to the weekend this year. According to Flight Radar 24, Friday July 7 was the busiest day for global commercial aviation that they’ve ever tracked.

Tuesday

Small Business Optimism

Small business owner optimism improved in June. Sentiment is now as positive as it’s been since November 2022 but is still way worse than before the pandemic.

The good news: fewer small business owners increased their prices over the past quarter than in any month since March 2021, and the share of owners naming inflation as their single most important problem fell to 24%, down 10 percentage points over the past year.

The bad news: the share of owners planning to increase their employment fell and, broadly speaking, their outlook for sales growth remains absolutely dismal.

Supply Chain Update

Because this Tuesday is light on data releases, it seems like a good time for a supply chain update. The short of it is, supply chains are healed. The New York Fed’s Global Supply Chain Pressure Index showed that in May, global supply chains experienced the least pressure of any month since the start of the data series in 1997 (though the GSCPI did increase slightly in June).  

Freight rate data support this finding. International container rates have fallen 88% since the peak in late 2021, according to the Freightos Baltic Index, and North American truck freight rates are down more than 10% over the past year, according to the Cass Freight Index.

There are a few factors at play here. The pandemic ending obviously helped, as has recent weakness in global demand. Domestically, demand for goods is reverting back toward something like normal. This should help with inflation, at least on the goods side of the economy, which makes for a perfect segue into…

Wednesday

Consumer Price Index (INFLATION)