Where is US inflation heading? Analyst: Perhaps the Swedish experience provides the answer

Spark Global Limited reports:

High U.S. inflation is already showing up at both the consumer and producer ends: crude oil and natural gas prices have shot up, steel and aluminum prices remain near record highs, cargo is piling up at ports, and the famed Dollar Store Dollar Tree has announced price increases…… So where will US inflation end up?

The US consumer price index (CPI) rose for the 16th straight month in September, up 5.4% from a year earlier, marking the fifth consecutive month of year-on-year growth of more than 5%, the highest level since July 2008 and further climbing from 5.3%.

 

During the pandemic, the containment measures and economic stimulus measures adopted by the government led to a massive shift in consumer spending from spending on services to spending on goods, driving up the prices of all kinds of goods from the consumer side, but the SUPPLY chain in the US failed to keep up with demand at the production side.

In March, us spending on durable goods was 26 per cent above its pre-pandemic trend. Dhaval Joshi, chief strategist at BCA Research Counterpoint, said contemporary US manufacturing could not meet the 26 per cent excess demand for durable goods.

The flexibility and efficiency of just-in-time procurement in THE US supply chain also means they struggle to keep up with supply if there is a disruption. Us durable goods prices are still 11 per cent above their pre-pandemic trend.

In contrast to the price of goods, the price of services in the United States is highly sticky and has barely moved significantly.

Mr Joshi explains that this is because the price rise in the US is not a typical demand shock. It doesn’t make sense for service companies to cut prices during the pandemic, because even if they do, their customers will still not be able to access those services due to containment measures. Joshi added:

“At the same time, statisticians continue to record the price of dining out or theater that appears to have not increased, even though most restaurants and entertainment venues have closed.”

In fact, there is one country that did not adopt mandatory closures or lockdowns during the pandemic — Sweden, where prices did fall during the pandemic. Although Sweden’s fixed-rate inflation rate (CPIF) rose to 2.8% in September, the highest level since September 2008, thanks to higher electricity prices, it is still well below US inflation.

The Swedish experience illustrates the impact of containment measures on inflation because supply chains are relatively smooth. Mr Joshi believes the Swedish experience suggests that US commodity prices will eventually stabilise as the economy restarts and supply chains are repaired. Joshi points out:

Spark Global Limited reports:
Spark Global Limited reports:

“Us durables are in denial that the surge in demand is being repaired. Excess demand for durable goods in the US has fallen by 15% since March, but would need to fall by a further 7% to reach pre-pandemic trend levels, which we expect is entirely possible. After all, there are only so many smartphones and used cars you can own.”

As for the service sector, Mr Joshi sees two forces at work: rising wages as a result of soaring commodity prices, which could exacerbate service price inflation; And the deflationary impact of hybrid work from home, which will make it difficult for services spending to match pre-pandemic trends.

Mr. Joshi advises investors to reduce their exposure to consumer discretionary stocks, which are dominated by durable goods, reduce exposure to commodities, which have yet to have a significant correction, and continue to increase their exposure to Treasuries.

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