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Inflation: Signs of Relief

September 2, 2022

Inflation has been in the news for a long time now. Although it impacts us all differently, there are signs of relief ahead. Take a deep dive into the data in the latest episode of TrendsTalk with ITR Economics President Alan Beaulieu.



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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, this is Alan Beaulieu from ITR Economics. I just want to talk to you a few minutes about inflation. I know, you're probably tired of hearing about it, but I want to talk to you about some signs of relief for some, and I want to put it in the context of people, and then we're going to end with the context of the macro.

So we have some things to cover and this inflation is a word we hear a lot, but it impacts people differently and it impacts us in different ways. For instance, right now, the consumer price index is at 8.7% on a 3/12 rate of change. That's high, obviously, 40-plus year high. We all know that.

But that's not the end of the story. When you look at the core CPI, which is without food and energy, the 3/12 is at 5.9%, but it's coming down. It's been coming down for three months and it's coming down just ever-so-slightly steeper than normal pace, which you would expect given the peak so it's encouraging.

What the Federal Reserve board looks at, which is personal consumption expenditure price index, has a 3/12 or 4.7, excuse me, and it is also coming down. So whether you're looking at the CPI, which the Fed does not look at, or if you look at what the Fed looks at, they're both easing and that certainly is good news.

Now it doesn't mean the same to all people, though. It depends a lot on your occupation and who you are. For instance, I could tell you the median annual earnings in this country are up 5.2% year-over-year on 3/12 basis and that's good news for folks if you're talking about CPI for medical care. That's up to 4.4%. Or if you're looking at shelter, that's up 5.6% so income there on median is keeping pace with shelter costs.

It's not keeping pace, obviously, with food and with energy. Fortunately, we see some help on the horizon with energy and food is something that is difficult for a lot of people and I'm not trying to diminish that at all. But on median when people or, on average, perhaps what people are likely to do is just cut back on... The good, better, best mode is you go from best down to better down to good, or you switch into alternate forms of meals, perhaps less barrier.

But there's still a segment of the population where food is an issue. I'm not trying to take that away for a moment. As a cold-hearted economist, it's easier to forget about them. As a human being, it's hard to forget about them, which is why here at ITR, we're involved with organizations that help along these lines and I hope that you do, too.

But if we get back to economics, we can look at healthcare workers, for instance, and they're making 7.3% more year-over-year. These are all 3/12. So most of this, except for food and energy, is certainly they're doing better than the core. When you look at truck drivers, they're at 7.2%, also doing better. When you look at construction workers, 5.6, so they're doing better than what the Federal Reserve board looks at. They're doing almost as well as the core CPI so, in general, they're certainly keeping pace. Service sector is 5.4% above year-over-year in terms of earnings.

Now here's the thing. Those earnings are going to continue to see some upside pressure through the near term. Well, I've already said that the core and CPI, in general, is going to be moving lower so there's going to be this crossing over. So the pain that is in some people's homes, and it's very real, again, not diminishing that for a moment, there is some sunshine coming. There is some hope in the future, which is certainly good news for us as human beings. We like to know that that is the case and others will be doing better.

We are forecasting that the consumer price index by the end of 2023 will be down to right around 3%, a little more than 3%. What this means is that it's going to take a while, but there are better days ahead. There will be reasons to be optimistic.

Now that's the people part. Those are the numbers and certainly we all understand that there are some folks that are harder hit than others. Again, median means that half the people are doing better and so it's not nearly as much of an issue and half are not so it is certainly an issue, especially if you get down total lower income and we feel for them. But a lot of your businesses are driven by the macro trends so let's go back there.

The macro trends are what's important in terms of the rate of change by which you will gauge your future sales, up or down, and those macro trends are actually looking pretty good. We're going to see the rate of inflation come down for lots of good reasons, by the way, so money supply. It's also interest rates. It's the PCE is coming down. It is the oil price, 1/12 rate of change coming down. It is also the supply chain pressure index three-month moving average, which is coming down. It is a slowing in the economic growth of the world as we measure it through the world industrial production rate of change. I mean, all of that says that the inflation continues to ease and things will get easier as we go forward.

Why did I bring that up? Because right now retail sales deflated are doing well. They're not doing great, but they're doing well. When we deflated, when we take all that out of the picture, we find that the seasonal rise, that's three-month moving total seasonal rise since March, is slightly better than the 10-year average pre-COVID.

Now I don't want to include COVID because of all that stimulus money and all that Federal money coming out the door, it was all kinds of spending going on when we'd not expect that rate of rise to continue. So we go before COVID to the Great Before, and we say, "Hey, we're just a little better than average? That's not bad at all." When we look at June and the decline in June and the June decline is perfectly normal, it was slightly milder than the pre-COVID average. When we look at July's decline, it was just slightly milder than last year, 2021 and nobody's complaining about 2021. So overall on a macro basis, it's okay.

On the personal level, it's going to get better. And overall, as we see that it gets better and we see the tentative low and the retail sales 3/12 rate of change deflated, begin to move higher, that just speaks to the fact that the economy will get stronger later in 2023. Families and people will find that the pressures that are on them begin to ease and their incomes continue to move up and they should find themselves in a better position, which will fuel more economic growth through more consumption.

As we have that consumption driving growth, businesses will respond, the rates of change will be going up. If you're positively correlated to the economy, you're going to find your 3/12 rising, then your 12/12 rising, and you're going to get ready for more activity later in 2023 and certainly in 2024.

Pretty good out there right now. It's not to say it's perfect for everyone, but on a macro basis, there's good reasons to be looking for more economic activity later in 2023.

Thank you for being with us. It's ITR Economics TrendsTalk.



Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.