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CPI Data Released, Consumer Stocks Drop
Health Insurance CPI Skews Core CPI
The Consumer Price Index (CPI) has remained above 4.0% since May 2021, indicating persistent inflationary pressures. The Core CPI had an increase of 0.323% in September compared to August. The core CPI, which excludes volatile food and energy products, rose by 4.1% year-over-year in September.
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The Core CPI increase was significantly dragged down by the plunge in health insurance CPI. Continuing modifications to the health insurance CPI resulted in a consistent reduction, between 3.4%-4.3% each month. Consequently, in spite of the escalating prices in health insurance, the annual health insurance CPI experienced a dramatic decrease of 37.3%. The health insurance adjustment has understated core CPI and core services CPI. In fact, the health insurance CPI itself, as a price index, collapsed in September to the price level of August 2018, despite significant increases in health insurance costs. The medical care index rose by 0.2%, while hospital services increased by 1.5%. However, the index for physicians' services remained unchanged, and the prescription drugs index fell by 0.7%.
Energy prices, which experienced a steep decline in the second half of the previous year, reversed this year. In September, overall energy prices rose by 1.5% compared to August, nearly erasing the year-over-year plunge that had persisted since late last year. Gasoline prices have been surging throughout the year, with a 2.1% increase in September compared to August. This surge has also resulted in a positive year-over-year change (+3.0%). Gasoline accounts for approximately half of the total energy CPI.
The survey conducted on rental houses and apartments reveals that tenants are actually paying higher rents. The Owners Equivalent of Rent (OER) index, which estimates what homeowners believe their homes would rent for, increased by 7.1% year-over-year. This indicates that homeowners are expecting higher rental prices. The shelter component of CPI rose by 0.6% in September, following a 0.3% increase in the previous month. Rent prices increased by 0.5% in September, and owners' equivalent rent rose by 0.6%. Notably, the lodging away from home index increased by 3.7% in September, ending a streak of three consecutive monthly decreases.
The Consumer Price Index for durable goods has shown a different trend. After reaching high levels, it has been gradually decreasing. The CPI for new vehicles rose for the second consecutive month in September increasing by 2.2% year-over-year. In contrast, the CPI for used vehicles has been more volatile, experiencing a historic spike in prices in 2020 and peaking at the end of 2021. Since then, it has fallen by 12% but remains 35% higher than in September 2019.
Food prices at grocery stores and markets have also been a cause for concern. While the price increases have calmed down, they remain significantly high compared to pre-pandemic levels. The CPI for food at home increased by 0.1% month-to-month and 2.4% year-over-year, the lowest increase in over two years.
Social Security Increases
The government has announced that Social Security recipients will receive a 3.2% raise for 2024. This adjustment is higher than the average increase but may still not be enough to keep up with rising inflation. The annual cost-of-living adjustment (COLA) is determined by the difference in average inflation between the third quarter of the current year and the same period the previous year. While the 3.2% raise is lower than this year's historic 8.7% increase, it is still higher than the average of 2.6% over the past 20 years. This raise will add an extra $57 to the average monthly retiree benefit of $1,790.
A recent poll by the Senior Citizens League found that over 67% of respondents reported that their household expenses remain at least 10% higher than a year ago. Many older adults started this year with stretched finances, as last year's COLA of 5.9% did not adequately cover the sharp rise in prices experienced in 2022.
Producer Price Index
In September, producer prices rose by 0.5%, pushing the annual Producer Price Index (PPI) to 2.2%, the highest level since April. This increase was higher than the projected 0.3% rise. Over the past year, producer prices had been relatively low, but they have been steadily increasing since then. Core PPI, which excludes volatile food and energy prices, also rose by 0.3%, surpassing the forecasted 0.2% gain.
The surge in producer prices was primarily driven by a 0.9% increase in prices for final demand goods, with gas prices seeing a significant 5.4% increase. Prices for final demand services also increased by 0.3%. It is worth noting that producer prices are often seen as a leading indicator of future consumer price hikes, as consumer prices tend to lag behind producer prices.
In October, the University of Michigan Index of Consumer Sentiment, which measures how Americans feel about the economy, experienced a significant drop. The index fell by 7.5% from the previous month to a reading of 63.0, well below the expected slight decrease to 67.2. This decline in consumer sentiment was primarily driven by concerns over inflation, with assessments of personal finances dropping by about 15%.
Real Incomes & Wage Growth
A recent report reveals a shocking decline in real median household incomes in the United States. Prior to the pandemic, the average household income, adjusted for inflation, was around $78,000. However, this figure has now fallen below $75,000, representing a nearly $5,000 annual decrease. This decline is not just a result of inflation but also due to falling nominal wages in 17 states. The states experiencing the most significant struggles with falling nominal incomes include Oregon, Illinois, Minnesota, Wisconsin, New Hampshire, and Vermont.
The impact of falling real incomes on everyday Americans is evident. Credit card debt has skyrocketed while savings have plummeted. Despite the theoretical assumption that higher interest rates should slow spending and increase savings, the opposite is happening. People are spending more but buying less due to higher prices.
A new study by Primerica reveals that nearly 75% of middle-class Americans feel they are falling behind on basic living costs. The Bureau of Labor Statistics reports that real average hourly earnings for all employees decreased by 0.2% in September. On an annual basis, real average hourly earnings increased by 0.5% last month, which is not enough to keep pace with the 3.7% annual inflation rate in September.
Workers' wages in the United States are not expected to fully recover their loss of purchasing power due to inflation until the fourth quarter of 2024. This has led to an increase in labor strikes across various industries, with better wages being a major point of contention in negotiations. Inflation has been squeezing workers' incomes for nearly two years, as the cost of goods and services has rapidly increased while their incomes have not kept pace.
Stock Market Implications
Many consumer-oriented companies are experiencing a decline in their stock prices, with over two dozen stocks in the consumer staples and discretionary sectors of the S&P 500 hitting new 52-week lows in October. This includes retailers like Dollar General and Target, food companies like Kraft Heinz and Conagra Brands, and consumer products companies like Clorox and Colgate-Palmolive.
Companies in the retail industry are facing multiple challenges, including hesitant consumers, rising theft, and inventory losses. Investors and analysts believe that higher gasoline prices, tighter credit conditions, and persistent inflation are starting to impact consumers. U.S. consumer confidence has fallen for two consecutive months, reflecting growing unease about personal finances and the overall health of the economy.
Target has announced that an increase in crime will impact its profits this year and has plans to close nine locations due to safety concerns. The company's shares have fallen significantly in recent months, and investors have been pulling money from consumer-goods sector funds.
Dollar General has reported that its customers are purchasing fewer discretionary items and focusing more on essential goods, resulting in an inventory of unsold products. The company recently lowered its earnings and sales guidance for the year and announced that its former CEO would be returning to his position. Dollar General shares have experienced a significant decline of 33% in the past three months and 55% this year.
Walgreens has also observed a decrease in discretionary purchases by customers, who are instead taking advantage of promotions. The drugstore chain plans to close 150 unprofitable locations in the U.S. due to lower demand for Covid-19 test kits. Walgreens shares have fallen by 22% in the past three months and 38% this year.
The SPDR S&P Retail exchange-traded fund, which includes shares of various retailers, has dropped by 13%. The broad market has seen a 13% increase for the year, while the retail benchmark is down by 3%, marking the widest spread since 2017
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