Inflation Report: “Can’t You Hear Me Knocking?”
on the Consumer’s Door
Today’s inflation report delivers a stark warning, reminiscent of the Rolling Stones’ “Can’t You Hear Me Knocking” as inflation relentlessly hammers at the doors of American consumers. Despite a headline inflation rate of 3%, core inflation, which excludes the volatile food and energy sectors, has surged to 3.3%. The overall inflation rate may have slowed, but the prices that hit home hardest are still on the rise.
As the Rolling Stones’ powerful riffs echo in the background, “Can’t You Hear Me Knocking” underscores the pressing reality: inflation is not retreating quietly. Instead, it continues to creep into every facet of daily life, demanding our attention and action.
Rising Costs Across the Board
The data reveals several significant price increases that continue to burden American households:
• Car Insurance: Up 20%
• Services: Up 7%
• Car Maintenance and Repairs: Up 6%
• Rent: Up 5.5%
• Electricity: Up 4.5%
• Food Away from Home: Continues to rise, contributing to the higher core inflation rate.
These rising costs underscore that, despite the slowing inflation rate, the purchasing power of consumers remains under pressure.
Interest Rates and Market Reactions
Ironically, despite the Federal Reserve’s aggressive rate hikes—interest rates are at their highest in 24 years—inflation persists at elevated levels. This scenario is reminiscent of the chaotic riff in “Can’t You Hear Me Knocking,” where the relentless beat mirrors the persistent economic pressures.
In response to the inflation report, the bond market saw a flurry of activity. Investors rushed to buy bonds, driving the 10-year bond yield down to 4.17% from nearly 4.5%. The 2-year bond yield also fell, from 4.75% to 4.5%. The surge in bond buying reflects growing confidence that the Federal Reserve might lower short-term interest rates by the end of the year with a more confirmed recession ahead of the US Economy, potentially dropping to around 4.75% on the short end of the curve by December.
Stock Market Implications
For the stock market, the implications of lower inflation are less optimistic. Lower inflation typically signals lower earnings and growth, which does not bode well for today’s highly inflated stock market. The Shiller PE ratio stands at 36, the third highest on record (higher then 1929 and 1987 peak),
while the stock market capitalization to GDP ratio hits an unprecedented 200%, surpassing even the dot-com bubble. This indicator is what Warren Buffett called t”In 2001, Warren Buffett came up with what he called “probably the best single measure of where [stock] valuations stand at any given moment.”
The S&P 500 price-to-sales ratio is also at a record high of 3.
Given these valuations, companies will struggle to maintain high valuations without significant price increases. The NASDAQ reflected this concern, declining by almost -2%. For more in-depth analysis on todays stock market bubble check out these previous articles:
Corporate Earnings Under Pressure
The impact of inflation on consumer spending is evident in recent corporate earnings reports. McDonald’s, for example, is at a 52-week low, down almost 15%. The fast-food giant introduced a $5 value meal to entice cost-conscious customers, which in turn squeezed its earnings and margins. This illustrates how inflation erodes consumer purchasing power, leading to reduced spending and lower corporate profits.
With Americans’ savings dwindling and credit card debt at record highs, reduced consumer spending will likely lead to lower hiring and rising unemployment, further curbing income growth. This cycle of decreased spending and rising defaults poses a significant threat to the economy, reminiscent of the regional banking issues seen last year.
Sector-Specific Impacts
Several major consumer stocks have not participated in the recent stock market rally. Lululemon is down 23% over the past year, Helen of Troy has plummeted 50%, and Nike, a bellwether for economic health, has declined 31%. These declines highlight how inflation continues to affect consumer spending on discretionary items.
Precious Metals Shine Amidst Economic Uncertainty
In contrast, gold has hit a new record high of $2,450, making it the best-performing asset of 2024 with a 17% increase (For more on Golds Record high price checkout our previous report HERE .) Silver is also having a remarkable year, up 2.5% today and 32% year-to-date. These gains indicate that investors are seeking refuge in precious metals amidst stagflation concerns, where certain prices rise while the overall economy deteriorates.
Conclusion
The current economic landscape, as highlighted by today’s inflation report, presents a complex and challenging environment. The mixed signals of lower inflation rates alongside persistent price increases in essential services and goods suggest that the economic recovery is far from stable. As the Rolling Stones might put it, “Can’t you hear me knocking?”—inflation continues to knock on the consumer’s door, demanding attention and strategic response.