The “peak inflation” crowd scored another win Thursday.
24 hours after warmly embracing a cooler-than-expected CPI report, investors clamoring for more evidence to support the notion that inflation is set to recede were handed a favorable read on producer prices, which fell 0.5% MoM in July.
No economist out of more than four-dozen surveyed predicted a monthly decline. It was the first monthly drop of the pandemic era.
When taken in conjunction with the unchanged read on consumer prices for July (figure above), anyone looking for an excuse to turn more constructive on an equity rally most professionals derided as unsustainable has one — an excuse, I mean.
Needless to say, the relief came courtesy of a big drop in final demand goods, the index for which notched one of the biggest monthly declines on record in data back to 2010.
That, in turn, was thanks to the fourth largest MoM decrease in the energy gauge ever (figure below).
80% of the drop in the final demand goods index was down to a near 17% plunge in gasoline prices.
Similar to the CPI report, there was scant evidence of relief on the food gauge, which rose 1% MoM. The services index ticked higher, the third consecutive monthly increase.
Excluding food and energy, prices rose 0.2% from June, half the expected 0.4% increase and tied for the slowest monthly pace of 2022.
Excluding food, energy and trade services, PPI rose 5.8% on a 12-month, unadjusted basis. That marked the first sub-6% print since June of 2021. The headline final demand gauge logged a 9.8% YoY increase, the first time since November that the 12-month gain wasn’t double-digits (figure below).
Again, optimists (and those anxious to buy stocks) will note the simultaneous “rollover” in consumer and factory-gate prices. The astute among you will suggest (correctly or not) that waning pipeline pressure could presage additional declines in consumer prices.
Of course, all of this comes with the caveat that it’s an energy-driven phenomenon. The only problem I have with that critique is that if we’re going to “count” energy when it comes to decrying and sensationalizing rampant price growth, we can’t ignore energy when price growth is receding. Otherwise, we’re just looking for excuses to amplify bad news while simultaneously downplaying positive developments.
Still, I’m not inclined to drop my “false dawn” characterization, employed here on Wednesday to describe July’s CPI report. All anyone can say, for now, is that things didn’t get worse last month. Unless you ate food. In which case yes, things were probably a little worse.
A single data point, but, yes, it looks as if inflation in the U.S. may have peaked. Still high, though, and likely to persist at high levels as Russia puts the screws on the eurozone’s nat gas supplies and energy prices head back up as colder weather arrives in the northern hemisphere. The Fed has more work to do. 100bps by year-end? I’m inclined to take the over.
It seems as if oil is just as fungible as cash.
Are the sanctions against certain oil really working?
I have my doubts.
This comment doesn’t belong here except in terms of timeliness, but h/t to H for calling out the Soleimani assassination as a potential black swan event that no one talks about much. The news out this week makes clear that it was a bigger deal at the time than media coverage then suggested, and still may not be fully in our rear view mirrors.
It was a huge deal and one of the riskiest gambles made by any modern US president, with the (obvious) caveat that I’m talking about gambles the public knows about. I’m sure there’s a long list of riskier gambles by every president that we’ll never be apprised of, but as I put it in the minutes after the strike, it was impossible to convey the gravity of that decision. The English language wasn’t a sufficient tool to describe the peril. I hope (I really, really do) that Trump had a good reason to believe Iran wouldn’t risk it all to retaliate, and by retaliate I don’t mean any plots against US officials, I mean an all-in, immediate, next-day ballistic missile attack on anything and everything within range, even if it meant chancing a US ground invasion. Apparently, Trump did indeed have a reason to believe that wasn’t going to happen. The subsequent missile strikes on the US base in Iraq were (in my opinion) coordinated with Tehran to avoid US casualties and give Khamenei a chance to pretend like he did something. Unfortunately, there was no coordination with local civilian air traffic control.
Soleimani was, by every account, the most dangerous spy in the world, and the most feared man in the Middle East. You can’t just drone him. Or at least nobody thought you could, including, by the way, Israel, which famously tracked his movements and could’ve killed him at any time, but never did because, again, you don’t just kill Qassem. Unless you’re Donald Trump. It was a truly mind-boggling affair and — you know — begrudging kudos to Trump I guess. It worked out. But no, it’s never going to be “over.” Not in Iran’s mind.
But I have to admit, their unwillingness to chance a ground war with the US in retaliation came across as a remarkable sign of weakness. Not that they could win a conventional war with the US military, but the whole “irrational actor” mystique kinda fell apart when they didn’t do much. They were pretty rational when push came to shove. That “should’ve” meant war. Immediately. Especially if Iran was, in fact, an irrational actor prone to erratic decision making. It seems to me like Khamenei decided that no, avenging Qassem wasn’t worth US tanks rolling through Tehran, which they would’ve been in fairly short order had he done anything crazy. We’d have disabled their ballistic missile program within hours and the IRGC might’ve held up for — I don’t know — a month, maybe, and that’d have been it for Khamenei.
If the US droned a Russian general in Ukraine, we’d be at war next week. If the US droned Sergei Shoigu on a trip to Ukraine, we’d be at war tomorrow. Soleimani was, effectively, the defense minister, the intelligence chief, the highest ranking field general and Khamenei’s number-two, all rolled up into one guy. If you’d told him in 2014 that he’d be killed by Donald Trump and you could prove it with a newspaper clipping from the future, I imagine he’d have been speechless.
It was a bad risk that ended up working out for the US and her allies (so far).
I’ll admit that I reflexively have difficulty giving Trump credit for anything requiring depth of understanding and courage. So in this case, my speculation is that a wayward hawk got into his ear, much like Cheney, Rumsfeld and Wolfowitz got into Bush’s. This seems confirmed by Trump’s struggle to even approximately pronounce Soleimani’s name after his killing. Along the same lines, after al-Zawahri was recently killed, reports again surfaced that Trump preferred to pass on him (and al-Baghdadi for a time) to focus instead on a bigger “name” like Hamza Bin Laden, as that was the only target name he was familiar with.
I agree wholeheartedly with your points and conclusions above, especially that Iran’s failure to respond made them look weak. At the same time, however, it looks to me that the US’ escaping any meaningful repercussions was more a product of dumb luck than strategic intelligence and foresignt.
John Bolton.
100%. Not only as a chief policy architect (and I use that term under protest), but also a relatively soft target compared to the ones I named. Pompeo was also reportedly on the list and I am sure there were others.
I remember putting down candles and flowers in front of an Iranian bakery in the aftermath.
The fact that Donald Trumps actions led to thirteen people from my hometown (and an additional 125 from the rest of the country) being killed still makes me sick to my stomach.
Old story:
Two old Iranian friends meet by chance and Ahmad asks Babak what he has been doing lately. Babak responds that he just got back from Isfahan where he killed Farid for insulting his wife twenty years ago. To which Ahmad replies “what was your hurry?”
Middle easterners have a long memory and great patience. The 1953 CIA assignation of democratically elected Prime Minister Mohammad Mosaddegh and the bloody aftermath are is still part of Iranian memory and culture. Iran will always be a threat to the US and so the low grade war continues into this century. We have payed, we are paying and we will pay some more for our new age economic colonialism. Iranians are also smart enough to know that an overt missile attack would be easily traced to them and retaliation would be immediate. If they do mount a nuclear, biologic or chemical attack on the US it will be delivered by UPS and traceable to China or Russia. We are not the only nation capable of a false flag attack.
Unfortunately there will be at least one generation of yet to be determined additional consequences for the assassination…we’ve got the disastrously failed wars in Afghanistan and Iraq, this seminal event…all waged by presidents who did not receive majority of votes in so called democracies…negative consequences abound, … including Putin’s inhumane aggression in Ukraine and China’s escalations in Hong Kong and Taiwan…it’s all related…
The media coverage claiming that the US and Iran were on the brink of war was conspicuously lacking any evidence of senior officials who were advocating an escalation to war, or any military mobilization consistent with preparations for major conflict. Only one mid-level Iranian official was quoted as saying the US had crossed a red line. The actions of both countries contrasted sharply with what the “brink of war” headlines suggested, which was (in my opinion) way over the top.
Any retrospective judgments that it was an excessive or unjustified risk or a potential black swan event also seem to be unsubstantiated. What have we subsequently learned that makes us think the risk from the strike was not commensurate with whatever Soleimani was planning to do that required permission from the Ayatollah? Several high-ranking US officials said the risk of inaction was greater than the risk of action, and that was their ultimate rationale for moving forward with the strike at that time. Does anyone here have good reason to disbelieve that risk assessment, even with the benefit of hindsight? Iran’s tepid response may even suggest Soleimani was taking on too much risk for the Ayatollah’s liking, and his removal from the battlefield suited both sides.
“Does anyone here have good reason to disbelieve that risk assessment?”
Yes. It emanated from the Trump administration, which included ardent Iran hawks. Your question is akin to asking whether there’s any reason to disbelieve Coca-Cola when they tell you Cherry Coke is better than Cherry Pepsi. (It is. But I had to taste it for myself in order to make that judgment, because I can’t trust Coca-Cola to deliver an unbiased assessment.)
Also, there was no “their” in your “their ultimate rationale” statement. At the end of the day, these sorts of strikes (same with high-risk spec op raids on high value targets) generally require signoff from the executive. One person decided to “move forward with the strike.” That person was Donald Trump. And if your suggestion is that he possessed anything like a nuanced understanding of the situation (or even cared to learn), I’ll have to be the bearer of bad news: He didn’t. Because he didn’t (and doesn’t) have a nuanced understanding of anything, even real estate.
Of course the risk assessment didn’t come from Donald Trump. I’m saying the opposite, and that’s why it should be believed. You’re conflating “the Trump administration” with the people who actually gin up these strikes. Did Trump’s coterie of mostly clueless sycophants come up with the intent, intelligence, or strike opportunity, or did Persia House? Do you think Gina Haspel prioritizes Trump’s interests over the nation’s interests? Would JSOC just blindly go along with a plan that risked war, or would they easily find a way to drag their feet until cooler heads prevailed? Several people here are claiming there was excessive risk involved, but nothing other than sensational headlines evidences that risk. Were any actual red lines crossed? What steps did either side take to make ready for war? Or, instead, did both sides immediately de-escalate by doing a little dance of performative anger? I think the outside world just doesn’t know enough about the people who influence these decisions (Trump’s sycophants vs. CIA, NSC, and JSOC lifers) to reasonably argue that they were taking unjustified risks here. I wrote an op-ed trying to communicate this to the public, but my employer nixed it because it seemed to be granting the Trump administration a win, when my whole argument was that “the Trump administration” was involved in only the most superficial ways.
It’s very interesting that our international war of terror is conducted by the CIA, NSC, and JSOC lifers with our democratically elected leaders involved ‘in only the most superficial ways’. Can you tell us who is really in charge of these deep state operations that will lead to (9/11) X 10?
Interesting that July monthly PPI inflation at stage 1 is -1.7%, stage 2 is -6.1%, stage 3 -1.2%, stage 4 -0.6%, final demand -0.5%. All the way upstream, unprocessed goods is -12.4% (and the biggest decline is in non-food/energy). All the way downstream, trade of finished goods (cost of retailing and wholesaling) is +0.4%. I would love to see some supply chain analysis on this. Does this suggest a bolus of deflation is working its way through the system which will eventually show up in a larger decline in “final demand” goods and services? Not a rhetorical question.
I expect Fed to raise resolutely for the rest of 2022, no change there. The question is 2023. Market has been betting on Fed to stop hiking then and even cut. Fed has been saying it will keep raising then and no cuts. This is a credibility fight. Fed is losing.
If it turns out that we get disinflation towards the magical 2% with low prints over the next 2 months, I will be waiting for the mea culpa from Moe, Larry and Curly. These guys have been all over the media pushing their views as if they KNOW with certainty that the Fed is so far behind the curve- if they are wrong I hope to see them admit it publicly and quietly go away for a little while. I will probably be waiting for Godot on that one. The handwriting appears to be on the wall unless we get some additional inflationary shocks. I just hope we don’t get some deflationary shocks. Right now the FOMC is on the correct path- hope they read the tea leaves and slow down and take stock. (note I did not say stop- but if the data warrants it they should).