by Louis Navellier

June 22, 2021

Last Tuesday, while the Federal Open Market Committee (FOMC) was meeting in Washington DC, the Labor Department reported that the Producer Price Index (PPI) rose 0.8% in May, which is significantly higher than the economists’ consensus estimate of a 0.5% increase. In the past 12 months, the PPI has risen 6.6%, which is the fastest pace ever recorded in that fairly new series (i.e., since November 2010).

Food prices rose 2.6% in May, while overall energy prices rose 2.2%. The core PPI, excluding food, energy, and trade margins, rose 0.7% in May. The core PPI is now running at an annual pace of 5.3%, its fastest pace since 2014. This was not a big surprise, since economists were expecting higher prices, but now we have to see whether or not wholesale inflation is “transitory” or permanent. Right now, due to moderating commodity prices in June, inflation appears to be transitory, as the Fed had been anticipating.

In addition, the Labor Department reported on Wednesday that import prices rose 1.1% in May, up from 0.8% in April. In the past 12 months, import prices rose 11.3%, which is the fastest pace since 2011. By comparison, export prices rose 2.2% in May, up from 1.1% in April. In the past 12 months, export prices rose 17.7%. Although much of the higher import and export prices are related to energy, there is no doubt that inflation had been alive and well until early June, when prices for many commodities consolidated, giving credence to the Fed’s “transitory” argument. And, as I mentioned in Friday’s podcast, some of the recent commodity crunch is due to China releasing some of its commodity reserves to combat inflation.

In its Wednesday announcement, the Fed acknowledged stronger-than-expected economic growth and raised its annual GDP forecast to 7%, up from 6.5% previously estimated. Additionally, the Fed raised its annual inflation target to 3.4%, up from 2.4%, but overall, in my opinion, the FOMC statement was very dovish. Since there was no “tapering” guidance, the $120 billion per month in quantitative easing will continue, and key interest rates will remain low for the foreseeable future.

Speaking of stronger growth, the Atlanta Fed revised its second-quarter GDP estimate slightly to a 10.3% annual pace on Thursday, down from a torrid 10.5% rate, but anything above 10% is red-hot growth.

The big surprise in the Wednesday FOMC statement was that 13 of 18 FOMC officials now expect a key interest rate hike to come by the end of 2023, but the FOMC reiterated that it expects to continue its quantitative easing until “substantial further progress” has been made in the economic recovery.

Higher Prices are the “Cure” For Rising Inflation

There’s an old saying by commodity traders that explains “transitory” inflation: “The best cure for high commodity prices is high commodity prices.” When prices go up, people tend to stop buying a product, or they seek alternatives. All you have to do is look at the details of the May retail sales report, in which the Commerce Department announced that retail sales declined 1.3%, significantly worse than the economists’ consensus expectation of a 0.8% decline. The report shows how people react to higher prices.

First off, building material sales declined 5.9% in May as builders were reluctant to pay the higher prices for copper, lumber, steel, and other building materials. Vehicle sales also declined 3.7% in May, due to rising prices, stemming from the ongoing semiconductor chip shortage. In the past 12 months, clothing sales were up 200.3% (but 3% in May), while electronics & appliances were down -3.42% in May after rising 91% in the previous 12 months, so the trend is clearly toward slower demand at higher prices.

The fact that lumber prices rose 154.3% in the past 12 months through May has made some homebuilders more cautious, which may explain why the National Association of Home Builders on Tuesday reported that homebuilder confidence is now running at a 10-month low. Another sign of a slowing housing market and lower homebuilder confidence is that building permits declined 3% in May to an annual rate of 1.681 million. Higher home prices are clearly impeding new home sales, despite low interest-rate mortgages.

These downbeat reports also clearly allow the Fed to remain “accommodative” with interest rates and QE.

Another reason for the Fed to be cautious is that the Commerce Department on Wednesday reported that housing starts only rose by 3.6% in May to an annual pace of 1.572 million, while April’s housing starts were revised down to an annual pace of 1.517 million (from 1.569 million previously reported). Housing starts hit a peak of 1.733 million in March and are now decelerating. Economists were expecting May housing starts to come in at a 1.63 million annual rate, so this deceleration is much larger than expected.

On Thursday, the Labor Department reported that new jobless claims rose to 412,000 in the latest week, compared to a revised 375,000 in the previous week. Continuing unemployment claims came in at 3.518 million, up a tick from a revised 3.517 million in the previous week. Economists were expecting weekly and continuing job claims to come in at 360,000 and 3.425 million, respectively, so last week’s jobs numbers were disappointing. Despite millions of jobs going unfilled, unemployment remains elevated, due in large part to extended jobless benefits. (All of this will allow the Fed to remain accommodative.)

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Commodity Inflation is Coming Under Control

Income Mail by Bryan Perry
Confusion is a Major Market Nemesis

Growth Mail by Gary Alexander
The Grand Experiment in “Funny Money” Continues

Global Mail by Ivan Martchev
The Fed’s “Untaper Tantrum”

Sector Spotlight by Jason Bodner
Why I Am Ignoring Last Friday’s Market Mess

View Full Archive
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Louis Navellier
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