Inflation begins to ease, but prices will remain high for some time

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Gasoline prices are dropping like a rock. Chicken wings are suddenly expensive. And distributors drowning in excess inventory are looking to make deals.

After years of rising prices, many consumers are finally starting to relax. Even rent and car prices, two things that destroyed millions of budgets this year, are out of control.

The global supply chain is operating normally, as many consumers spend more on specialty services such as restaurant meals and less on goods such as furniture and computers from the ocean. The cost of shipping a typical 40-foot container from China to the U.S. West Coast was $1,935 — down more than 90 percent from its September 2021 peak of $20,586, according to Freightos online freight marketplace.

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Moderate inflation is just beginning to show in government statistics. In October, the Federal Reserve’s price index, the personal spending index, posted its smallest monthly increase. since September last year, and is up 6 percent over the past 12 months. Consumer prices rose at an annual rate of 7.7 percent, down from 9.1 percent in June.

“The worst of inflation is behind us,” said Steven Blitz, chief US economist for TS Lombard in New York. “The question is where is inflation going to sit?”

The Fed has been raising interest rates sharply since March to bring inflation back to its 2 percent stability target. Fed Chairman Jerome H. Powell on Wednesday noted signs of progress, but said it was too early to claim victory. A stronger-than-expected jobs report on Friday, which showed wages rising too quickly for policymakers’ tastes, underscored the point. The central bank does not expect to achieve its inflation target until 2025.

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“It will take more evidence to give comfort that the cost of living is really falling.” Either way, inflation remains too high,” Powell told an audience at the Brookings Institution.

However, there are clear signs of improvement in commodity prices, as consumers continue their pre-pandemic spending patterns. Excluding variable food and energy prices, consumer prices rose 5.1 percent in October, down from a 12.3 percent annual rate in February.

But as commodity prices begin to cool, pressure on services increases. Increased demand and limited supply – think short-staffed restaurants – have service increases running at an annual rate of 6.7 percent, more than double the previous year.

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“The expectation is that the price of goods will continue to decrease. But the increase in services will gradually slow and become stronger,” said Kathy Bostjancic, chief economist at Nationwide.

Much of what is happening now in prices reflects the development of a particular market or the return of consumers to their pre-pandemic ways. The decrease in the cost of shipping by sea, in itself, removed about 0.7 percent from the inflation rate, said Zvi Schreiber, CEO of Freightos.

By making credit more expensive, the Fed has placed huge profits on the housing industry. With short-term mortgage rates rising 7 percent recently, pending home sales in October were 37 percent lower than a year earlier, according to the National Association of Realtors. . But the full impact on the economy of interest rates will take several months to materialize.

In any case, customers are not surprised. Less than 1 percent of respondents to a recent Census Bureau survey said they had noticed a decrease in the price of goods and services in the past two months. And 15.7 percent of households said it was “difficult” to pay their regular household expenses, a figure that was unchanged from the 15.9 percent who reported financial difficulties last month. June.

To be sure, in a $26 trillion economy, the cost of some products continues to fall even as many go up. In June, after inflation reached its highest level in more than 40 years, prices for bacon, window coverings and sweaters fell for the month. men, according to the Bureau of Statistics. Therefore, it is important not to exaggerate recent improvements.

That is, the global economy has changed.

With Europe and the United Kingdom in recession and China covered by its zero-covid policy, demand for oil has fallen. Brent crude is now around $85 a barrel, less than a third of what it was at the beginning of March after Russia invaded Ukraine. As a result, the average price of a gallon of regular gasoline is $3.47, down almost 8 percent from a month ago, according to AAA.

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Many retailers find themselves in unusual inventory, the result of a two-year herky-jerky supply chain. But as shipping and raw material costs dropped, companies like Ikea began to cut select prices. Tolga Oncu, head of retail at Ingka Group, the parent company of Ikea, told Reuters this week that he was “very optimistic” about the possibility of further reductions in prices. next month.

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The company did not respond to a request for comment.

Walmart also said last month that it would look for opportunities to cut prices. Sam’s Club, a member warehouse store, recently cut the price of a house hot dog and soda to $1.38 from $1.50, undercutting rival Costco.

“Living with high prices this year has a cumulative effect on our customers, especially for those who are most budget-conscious, and therefore we are focused on reducing prices and prices as quickly as possible. as possible in items and categories,” Doug McMillon, Walmart CEO, told investors in November.

Chickens, cars and rents provide clues as to why forecasters expect inflation to pick up next month, even if a return to the 2 percent target will take years the Fed.

The price of chicken has increased near the highest level in the beginning of this year. Covid restrictions on poultry plants with an unexpected drop in the number of hatchlings have succeeded in reducing supply as demand has increased.

“It just created price pressure,” said Matt Busardo, market reporter for food industry information provider Urner Barry.

The situation was reversed this fall, when production increased in time for the normal seasonal decline. The amount of chicken in cold storage has increased by nearly 20 percent since May, according to the US Department of Agriculture.

That led to a deal — at least for the restaurant. Wholesale prices for boneless chicken breasts have dropped significantly in the past six months, Busardo said. At Wingstop, a Dallas-based fast-food chain, executives said the price of bone-in chicken wings fell nearly 43 percent in the quarter ended Sept. 24.

“We have a good outlook, not only for bone-in wings, but also for breast meat, which we believe will continue into early 2023,” said Alex Kaleida, head of financial officer, to investors on October 26.

The company did not lower retail prices, but said it is offering a fresh chicken sandwich for $5.29 and a combo meal of 20 wings and large fries for $16.99 to share the savings.

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After peaking in 2021, wholesale auto prices are down 15 percent since January, according to Atlanta-based auto sales firm Manheim. And those discounts are starting to show up in the prices consumers pay, said Jonathan Smoke, chief economist for Cox Automotive.

The price of a new car will be slower to react. Dealers at the end of October had 1.56 million vehicles, the highest number since May 2021. That was enough to cover 49 days of sales, up significantly from a year ago but still well below the pre-pandemic figure of 86, according to Cox.

More supply means fewer consumers are paying more than the manufacturer’s suggested retail price, a common occurrence during pandemics. The average new car sold in October was $46,991, which was $230 above MSRP, according to Edmund’s, a car sales website. In May, the average buyer paid $721 more than the list price.

Improving conditions in the new car market are also driving buyers away from the used car market, which is helping to lower demand and lower prices for these items. .

“The second-hand market has benefited from abnormal demand during the epidemic as a result of pressure on consumers to buy [who] may have had or wanted to buy a new one,” Smoke said via email.

Meanwhile, rents, after rising higher throughout the year, have cooled. The average rent for a two-bedroom home rose 8.1 percent from a year ago, down from a rate of 14.6 percent in April, the Zumper, an online marketplace.

The change was especially dramatic in cities like Boise, Phoenix and Austin, which benefited from workers moving to take advantage of the work-from-home season.

“Rental prices are cooling and cooling faster than anyone expected,” said Anthemos Georgiades, CEO of Zumper. “’23 will be an easier year for renters.”

Real-time hiring data takes months to appear in government statistics, Powell said in his Brookings speech. But it will begin to contribute to the lowering of the cost of living next year, which explains why most forecasters expect the possibility of a decrease in the cost of living.

The Fed expects a measure of inflation, the PCE index, to reach 2.8 percent by the end of next year, down from 6 percent today.

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