October 2, 2023
Inflation Optimism - Flexport Weekly Economic Report
The August inflation numbers looked good. Exactly how good depends where you look. Apart from surging energy prices, there were encouraging downward trends.
In Focus - High Frequency Price Measures
The August Personal Income and Outlays report came bearing some good news on inflation. If you picked just the right indicator and just the right frequency, the Fed’s inflation target was met!
You can see this on the graph, where the red line at the end dips just below the 2.0% Fed goal, with an August value of 1.8%.
The astute observer of inflation reporting might well ask: Is this cherry-picking?
Maybe a little. But the news is good. Let’s take it from the top.
First, there are multiple inflation measures we might look at. The two most prominent are the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) deflator. How to choose? The Fed has indicated a preference for tracking the PCE index. That’s what came out last week.
Next, there’s a question of time frame. This was the release for August 2023. So one could look at the change from August 2022 (year over year), February 2023 (six month), or July 2023 (one month). For the latter two, you annualize (i.e. square the six month change). This choice matters. If we look at the full PCE deflator, the annualized rate was 3.5%; six-month annualized was 2.6%;l and one-month annualized was 4.8% (the dashed line in the graph).
Which is right? It depends what we’re looking for. Longer measures smooth out monthly fluctuations, but the results depend on what was happening a year ago.
The graph goes for recency and looks at the 1-month change. It then offers four variations. In addition to the aforementioned PCE of 4.8%, the core PCE reading was 1.8% (the red line). A different way to control for volatility – the Dallas Fed’s Trimmed Mean PCE – was 2.6% (thick black line), and the services component of the PCE was 2.5%.
How to choose? It helps to be consistent. If you followed Trimmed Mean PCE all along, stick with it. But then you need to acknowledge the volatility. The one-month figures are noisy and one shouldn’t put too much weight on a single month.
The encouraging part of the data is that the last year seems to show inflation falling. The clear exception for August was the full PCE, which rose notably. We have previously discussed the importance of rising energy prices.
So what does this mean? Ideally, we would have a reliable model of inflation, would plug these new numbers in, and see how the forecast changed. There are inflation models. None have proven very reliable in recent years.
There are a number of notable challenges looming, including higher energy prices driving up costs, strikes and wage pressures, plus serious budgetary pressures on the federal government as it refinances its large debt at higher interest rates.
But, back to the graph, the red and thick black lines are trending in the right direction, at least for the moment. And we can be happy about that.
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Latest Flexport Metrics & Research
Last week we provided a run-down of select measures of recent global trade activity, finding all might not be as dire as it seems.
Along the same lines, this week we look at the performance of U.S. exports, which Flexport currently forecasts to end the year up over 2022.
U.S. real GDP, increased at a rate of 2.1% in the second quarter, a slowdown 0.1 percentage point from the first quarter. There was a downward revision to consumer spending to 0.1%; spending on durable goods fell 0.3%, while spending on services rose by 1.0%. Real disposable personal income shrank by 0.2%, the second consecutive quarter-on-quarter contraction.
UK GDP grew 0.2% in the second quarter (April to June) and first quarter growth was also revised up to 0.3%. Real GDP is now projected to be 1.8% above pre-pandemic levels, placing the UK’s performance above that of Germany and France.
U.S. Consumer Sentiment ticked down by a slight 1.4 index points in September from the August reading in a survey that was fielded before agreement was reached to avoid a government shutdown. Year-ahead inflation expectations improved to 3.2% from the 3.5% recorded in August and at 2.8%, long-run expectations are nearing the pre-pandemic average.
Euro area headline inflation is estimated to have declined to 4.3% in September from 5.2% in August, while the more closely-watched core number, which excludes energy, food, alcohol and tobacco, is estimated to have fallen to 4.5%. Energy prices were down for the fifth straight month. Annualized service sector inflation slowed to 4.7%.
The major trade data releases from last week were largely positive, or at least indicative of a potential rebound heading into the fall:
U.S. advanced August trade figures showed exports up 2.1% over July, adjusted for seasonality but not prices. Imports were down 1.2% month-on-month by the same.
Mexico’s August exports increased 3.8% year-on-year, led by non-oil exports to the U.S., which were up 5.2%. Exports to the rest of the world were down 0.1%.
South Korea’s September exports increased 5.4% month-on-month, the fifth month-on-month rise in the last six months, although they remained down year-on-year for the eleventh month in a row. Exports to China, its top trading partner, were down 17.6% but shipments to the US (+8.5%) and the EU (6.5%) both rose by the latter measure.
Vietnam’s September exports were up 4.6% year-on-year, the first rise by that measure in six months.
By a vote 88-6 the U.S. senate passed HR 5860, a continuing resolution that avoids a government shutdown until at least November 17. Failure to reach an agreement may have resulted in another downgrade of the U.S.’ credit rating.
The European Court of Justice fined the UK €32 million for allowing boats to use a type of diesel that is taxed at a lower rate. The decision sets a potential precedent for other disputes involving taxes and trade between the UK and the EU.
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