by Louis Navellier
August 16, 2022
On Wednesday, the Labor Department announced that the Consumer Price Index (CPI) was unchanged at 0% in July (over June), a great indication that inflation has peaked! In the past 12 months, the CPI slowed from a 9.1% gain in June to 8.5% in July. The core rate of inflation, excluding food and energy, rose 5.9% in the last 12 months and +0.3% in July. The biggest reason for no net gains in July was that energy prices declined 4.6%, led by an 11% decline in fuel oil and a 7.7% decrease in gasoline prices.
The news got even better on Thursday, as the Labor Department reported that the Producer Price Index (PPI) declined 0.5% in July, the first monthly PPI decline since April 2020. Wholesale energy inflation plunged 9% in July and was the key reason for the net decline. Excluding food, energy, and trade margins, the core PPI rose 0.2% in July. In the last year, the PPI and core PPI are up 9.8% and 5.8%, respectively.
Despite this improving inflation news, the (so-called) Inflation Reduction Act could revive inflation by imposing more taxes on coal, crude oil, and natural gas, pushing up utility bills. A tax increase on methane emissions is another controversial energy tax, as the Inflation Reduction Act is essentially re-regulating carbon dioxide emissions in the wake of the Supreme Court’s landmark decision against the EPA. The U.S. is also following Canada and the European Union (EU) by trying to switch to organic fertilizers from chemical fertilizers, which is why farmers’ protests in the Netherlands may soon spread to Canada.
In the end, the Inflation Reduction Act is going to increase our electric bills and keep food prices high.
The Inflation Reduction Act also empowers China, since it includes $30 billion for solar panels, wind turbines, and batteries, mostly made in China, as well as incentives for geothermal and nuclear plants. There are also generous tax credits for buying electric vehicles (EVs). J. Kent Masters, chief executive of Albemarle Corp., said that lithium supply will remain tight for years. (Albemarle is the largest publicly traded lithium producer.) The result of the lithium-ion battery shortage is that more EV manufacturers are expected to follow Ford, Rivian, Tesla, and VW Group into less efficient and heavier iron phosphate batteries – dominated by China’s CATL. I must add that Ford increased the price of its F-150 Lightning last Tuesday by $6,000 to $8,500 due to “significant material costs increases and other factors.” Ford is merely following several other automakers, which have all raised their prices due to higher battery costs.
The technology sector so far has survived all of China’s threats of World War III (“Those who play with fire will perish by it” – Xi Jinping) as China’s extensive military exercises in the wake of House Speaker Nancy Pelosi’s visit to Taiwan did not provoke a military strike from either Taiwan or the U.S. Navy.
So, despite China launching missiles in the Taiwan Straits and generally acting badly in the wake of Nancy Pelosi’s Taiwan visit, China will gain the most in the Inflation Reduction Act by not starting any hot war, since China still dominates markets for batteries, solar panels, and processing rare earth metals.
However, China is hurting its economy in other areas, as many U.S. companies are expected to continue diverting their manufacturing to other Southeastern Asian countries, such as Vietnam or Thailand, or “onshoring” more of their manufacturing back to the U.S., at higher wages but safer supply chains.
During this election season, Congressional incumbents will likely brag about all the jobs they created via this Inflation Reduction Act, but there is no way that American workers can compete with slave labor by the Uyghurs in forced labor camps, which dominate solar panel manufacturing! As a result, the drive toward making “green” electric automobiles by Congress is making China more economically powerful.
In addition, one other fallout of Ford signing a deal with CATL to provide the batteries it needs to ramp up EV production is that Ford had to lay off 8,000 workers at the same time, so the indirect outsourcing of American jobs for EVs and batteries will only be accelerated by the Inflation Reduction Act.
There is one more thing that I really hate about the Inflation Reduction Act, and that is the 1% tax on stock buy-backs. I cannot tell you how devastating this is, as I expect many companies may elect to stop buy-backs and use their stock buy-back money to boost dividend payments instead. Buy-backs help boost earnings per share, a better long-term use of capital than dividends, in my view, so it will be fascinating to see how Boards of Directors decide what to do with their excess cash moving forward.
Finally, I should also add that a 15% minimum corporate income tax was also included in the Inflation Reduction Act, so it will be interesting to see how companies that pay no U.S. taxes, like Tesla, react. It is possible that some companies may follow Tesla and move more of their operations overseas.
A Split Verdict on the Other Economic News Released Last Week
Outside of the positive jobs report, the other indicators released last week were mixed. On the positive side, GDP growth seems to be returning, as the Atlanta Fed revised its third-quarter GDP estimate up to a +2.5% annual pace from its previous estimate of a 1.4% annual pace. The primary reason for this upward GDP revision is that consumer spending so far in the third quarter is running at a +2.7% annual pace.
On the downside, the Labor Department announced last Tuesday that productivity declined at a 4.6% annual pace in the second quarter, following a 7.4% productivity decline in the first quarter. Negative productivity is a drag on GDP growth. The Labor Department also announced that unit labor costs rose at a 10.8% rate last quarter. Since output did not rise as much, productivity fell for a second straight quarter.
In other news, the Labor Department said that weekly unemployment claims rose to 262,000 in the latest week, up from a revised 248,000. Continuing unemployment claims rose to 1.428 million compared to a revised 1.42 million. Although the four-week moving average for weekly claims was revised lower, continuing unemployment claims continue to rise. Overall, the labor market remains healthy.
Navellier & Associates owns Ford Motor Co. (F), and Volkswagen Ag. (VWAGY) in managed accounts and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Albemarle Corp., or Rivian Automotive (RIVN). Louis Navellier and his family own Ford Motor Co. (F), and Volkswagen Ag. (VWAGY) via a Navellier managed account. He does not own Tesla (TSLA), Rivian Automotive (RIVN), or Albemarle Corp. personally.