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Inflation Is Getting Less Scary

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Federal Reserve Board Chairman Jerome Powell laughing (Photo by Win McNamee/Getty Images)

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The Federal Reserve’s speedy interest rate raising is taking effect – in business and consumer behavior and in people’s heads. A slew of recent media reports confirms the good news.

  • First, that some price increases are slowing and a few are turning down
  • Second, that businesses and consumers are making constructive adjustments

Here are some good examples (all articles are from The Wall Street Journal):

Housing:

These articles show the Fed’s strategy is dampening the housing inflation. “Rent of primary residence” and “Owners’ equivalent rent of residences” account for almost one-third of the CPI (all items) basket. This “Shelter” inflation rate has been running at over 6%.

  • Climbing Interest Rates Crimp U.S. Home Sales” – That title confirms what was expected.
  • Housing Market Suits Some Buyers Just Fine” – The boom-like environment has given way to a more normal (and healthy) market. “Some buyers are finding that they would prefer to hunt now than deal with the bidding wars and sight-unseen purchases that defined last year’s frenzied market.”
  • Builders Prepare for Housing Slowdown” – Excellent article discusses the lessons homebuilders learned from the 2004-2007 housing bubble that they have applied to their current activities.
  • Price Rise For Homes Eased In August” delivers a typical year-over-year analysis. However, it then explains the changing dynamics revealed in the month-to-month price declines.
  • Apartment Demand Cools After Sharp Increase in Rent” – Excellent article that describes the rental situation, including shifts in renter behavior, increased vacancies and even rent reductions. “Americans are renting fewer apartments as demand in the third quarter fell to its lowest level in 13 years, after a long stretch of record-high rents.”

Supply chain:

The higher fees, costs and delays associated with the recent shortages and delivery tie-ups are much improved.

  • Container-Ship Bottleneck in Southern California Ends” – “The backup of container ships off Southern California’s coast that was at the heart of U.S. supply-chain congestion during the Covid-19 pandemic has effectively disappeared.”
  • Red-Hot Warehouse Market Shows Indications of Cooling” – “A pandemic-driven boom in warehousing demand is showing signs of slowing, as companies grow more cautious about leasing in an uncertain economy and look to pare back the big inventory stockpiles that have swamped storage space this year.”

Business inflation activity:

The move is afoot: “Companies’ Inflation Strategies Diverge” – “Proctor & Gamble Co. is ramping up advertising on premium brands. Verizon Communications VZ Inc. is raising prices on wireless plans, while Whirlpool WHR Corp. has slashed appliance production.”

Some businesses, like Proctor & Gamble, have “pricing power” (the ability to raise prices without seriously denting sales). Importantly, they all know that it is not a limitless strength. They know consumers will take action if prices get too high.

The bottom line – Capitalism again shows its strength

When CPI inflation hit 9% and the Fed was talking “pain,” many felt a recession or worse was inevitable. Now, a few months later, inflation doesn’t look so scary, and happier outcomes seem plausible. Certainly, the recent upsurge in stock prices shows that Wall Street is picking up on the positive possibilities.

So, expect capitalism’s broad, independent and similarly focused components will continue to improve conditions and outlooks.

And, remember: The Federal Reserve’s interest rate raising still has rates below the minimum level the capital markets would set. That rate would match the core inflation rate, adjusted for unusual effects (likely, around 5%). After all, savers and investors seek an interest income that at least matches the dollar’s loss of purchasing power.

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