Inflation and Jobs Climbing a Wall of Worries

April 14, 2023

“Good luck . . . .”

“Did you guys eat yet?”

“Are the kids okay?”

“The kids still alive?”

“Everyone okay without the captain?”

. . . that’s just a snapshot of the texts I get when the wife goes out of town. The last one from my mother-in-law.

It’s all good natured, but THIS IS the ultimate litmus test.

This week, we all get to play “have the kids been alive all this time partly because of Daddy . . . or in spite of him?”

Well kiddos, like the famous leader in that famous movie said . . .

My daughter just laughs. Not at the meme per se, but the idea that Daddy has any semblance of control. This’ll be about as scary as a hijacking though, I assure you.

What’s not so scary?

Inflation!

The CPI data pivoting as hard as the topics in this article. 5.0%, down from 9.1%, a lofty figure printed all the way back what . . . merely 6 months ago?

Just look at the components fall.

Durable goods detracting 0.75% of inflation YOY from the overall matrix, and non-durable goods (thanks to the fall in energy prices) really blowing down. None of this is exactly surprising. Why? Well, by goodness . . . our directionally predictive CPI thing-a-ma-jig . . . may be working?!

We know, we shouldn’t be surprised, but we partly are. Part of leadership is acting like you know what you’re doing when navigating uncertain waters, but psssst, let’s be honest . . . between us? This stuff is hard, and most people can’t even get it directionally correct. Fortunately, we’re doing okay, and fortunately for everyone (except short sellers), CPI is likely headed lower. For sure low 4s. Whether inflation can crack 4% kind of depends on oil, food and other commodities on the top left hand corner.

While CPI is important, let’s not forget jobs. When mommy’s away, everyone’s gotta chip in, and it sure looks like full employment right now with a 3.5% unemployment rate. It’s more helpful if we pair the unemployment data with the jobs opening data since the two will give you a sense of tightness.

While job openings are trending lower, it’s still well above pre-COVID levels because of the increased retirements coming out of the pandemic. Overtime, this will resolve itself (labor pool should “loosen”) because those early-retirees would’ve retired anyways, so the trend would’ve been the trend. You accelerate that in the span of 2-3 years, however, you can expect the labor market to remain squeezed in the short-run (unless if we throw the borders open and spur immigration).

What’s also enlightening is real wages. So pair the CPI report above (coming down) with wages (going up), you’re starting to see real wages (wages adjusted for inflation) start to climb.

What happens if these two streams cross Ghostbusters style?

Well, maybe not total protonic reversal, but very very likely a CPI reversal. Recall that we’ve long held the view that inflation will fall, but eventually hit a floor as wage increases will naturally drive higher inflation for everything. The trend certainly appears to be developing now as real wages gather momentum (and should continue to do so as inflation figures fall). Said another way, people will start to feel “wealthier” as their incomes keep pace, or in fact, outpace inflation. Do that and we’ll definitely drive demand higher, creating . . . you guessed it . . . more inflation. So down, up, down, up. Throw in a commodity super cycle and we’re looking at some volatile periods coming up.

Still for the next few months, we’re going to get a tailwind. The economic data will likely improve as headlines of falling inflation, a Fed pivot, and falling rates heighten investors’ appetites for risk assets. We’ll scale a wall of worries, but just be careful to attach a safety lines. You don’t want to get caught when the winds shift and inflation reasserts itself.

When in doubt, ask my kids . . . as Daddy took them indoor rock climbing!

That’s right . . . look at me . . . I’m the Captain now.

Well . . . not exactly.

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