Its a short day, today for Wall Street traders. Thanksgiving is off. Then there is another short day on Friday. These short days typically have very little volume traded. Even though traders get a short day, there was a significant amount of data that was put out this morning. The piece of data that has the bulk of my attention is the Personal Income and Outlays info. This includes the Personal Savings Rate and the Personal Consumption Expenditures index (PCE).
The PCE, minus food and energy, has resumed it’s take-off path. It is up to 4.1% now on a year-over-year basis. This is the highest the index has been since January of 1991. At that point in time, it was steadily in decline. Today we are facing the opposite. We have seen a rapid increase in a short period of time.
While comparisons to the 1970s are abundant, the comparisons aren’t exact. History rhymes, not repeats. The late sixties saw a stair-step increase in the PCE before it took off in the mid-seventies.
Our current experience is different. The US has experienced a long period of deflation. Then we had two decades of steady inflation between 1 and 2 percent. By calling the recent rapid rise in inflation “transitory”, the Fed has played into the history of the last 30 years of inflation data. This is what makes the “transitory” narrative so believable for so many.
In addition to the PCE index, the Personal Savings Rate was released.
It has hit the trend prior to the lock-downs. Americans received a great deal of money during the pandemic. Many held onto these funds due to several factors. One was that many stores had closed. A second was that there was worry about what the future would hold. Now that stores have re-opened and the future has become more clear to many, the savings rate has plunged. Consumers are opening their wallets and spending all those savings that they accumulated during the past two years. I think these added funds are a big reason so many consumers, while complaining about higher prices, aren’t balking at paying more. They have the funds available in their wallets to continue their present lifestyle and are choosing to do so.
At some point, consumers will have to make a difficult decision. They’ll have run out of “sunny day” funds and need to curtail their purchases. This will put the screws to the market. Profit margins will begin to suffer as retailers will attempt to lower prices in order to have sales.
A factor that offsets this is the wage rate.
Currently wages are growing at a 9.8% year-over-year clip. That is a very strong increase. As you can see from the previous decade, wages typically hung around the 5% mark. A look back into the past saw the compensation rate fluctuate between 5 and 11%.
This added compensation can help fill the gap caused by higher prices and current funds held by consumers. This is the wage-price spiral that Keynesians expound. What they don’t understand is that wages go up because prices have gone up. Not the other way around.
By having larger paychecks, consumers will have “lifestyle inflation”. More resources will go towards their standard of living. This coupled with real inflation will really set prices on fire.
A short note on the developing oil story. Two of the top oil producing nations (Russia and Saudi Arabia) have announced they are considering a pause on their oil production increases. Something to keep in mind is that OPEC is meeting next week to review their long-term deal that they reached earlier this year. I expect that many in the OPEC group will pause their planned production increases.
This will put the Biden administration is a tight spot. What happens when you corner an increasing unpredictable administration? They will lash out in ways that are harmful to themselves and others. There are a couple ways this couple play-out but all of them point to higher oil prices in the long-term. One option that the administration has already begun to float is halting all oil exports. This would lead to a historic surge in prices. Another option is giving consumers more stimulus money to help them fill their tanks. This would also cause oil prices to break higher. In addition, this would feed the inflation beast that has been unleashed.