Common Cents & Higher Prices

A couple of days ago, my wife asked me what I wanted for Father’s Day. Since I am not her father, I told her I wanted for nothing, and I meant it. If the kids want to give me a card or a hug around the neck, then so be it. In fact, I would like that very much.

However, after this morning’s Consumer Price Index (CPI) report, I have changed my mind about my Father’s Day wish list. I would now like the following items: 24 dozen mason jars, a pressure canner, a stove top still, copper tubing, 50 lbs. of yeast, 100 lbs. of sugar, 500 rounds of .22 caliber long-rifle ammunition, 250 rounds of 9 mm ammunition, 4 cases of 12-gauge shells (7.5 shot), 4 cases of 20-gauge shells (7.5 shot), 250 lbs. long grain white rice, 50 lbs. beef jerky, a pallet of canned tuna or chicken (either), a wide assortment of vegetable seeds, and a can of Vienna sausages for when things really hit the fan.

Is that too much to ask?

All kidding aside, I think I was kidding, the CPI report for May was unremittingly bad. Inflation.  Although I have been trying to find silver linings in dark clouds over the last several weeks, there were few to none in the data. Prices were up across the board. The lowest reading in the primary sectors was a 0.3% increase in ‘medical care commodities.’ Conversely, the highest observation was an eye-watering 16.9% increase in ‘fuel oil.’

In other words, there really is pain at the pump and elsewhere. Will it ever end?

The quick answer is yes. The problem is determining when. To that end, some of the headlines are downright pessimistic about the prospects for long-term, systemic inflation or even stagflation. The latter is a period of rising prices and decreasing economic growth. Arguably, we are currently in a period of stagflation, and you can scrap the word arguably.

Fortunately, the end is in sight. You just might need a magnifying glass or binoculars to see it. It depends on your level of myopia.

First off, higher prices usually, if not always, depress demand. As demand wanes, prices should come down over time. Second, the US dollar is extraordinarily strong right now. What is the old un-PC expression? Something about a 1-eyed man in the land of the blind? Historically, a strong currency will drive down prices as it makes imports less expensive. Given our massive trade imbalance, this should eventually lead to lower prices across the board.

Third, the Federal Reserve has already embarked on a tighter monetary policy. This makes money more expensive in the US economy. As with anything else, when money is more expensive, people will demand less of it, and the supply will slow down. This is already happening in the money supply, as the primary money supply gauge (M2), is currently growing at an anemic 3.51% annualized rate thus far in 2022.

Fourth, and this isn’t getting a lot of press, wholesale inventories have mushroomed an historic 23.7% over the last 12-months ending in April. This means the warehouses and the shelves are getting very close to being full. Inventories. As such, businesses are going to have to start selling all of this…this…stuff. The best way of doing that, obviously, is to cut prices.

To that end, perhaps I am alone, I have started seeing more BOGO (buy one get one free) sales at my local grocery stores. This for the first time in a very long time, and I have been able to save quite a bit of money in the process. Thank heavens for small favors.

To be sure, some things still seem to be in short supply. However, that has far more to do with distribution than it does with actual supply. Essentially, it is more of a labor issue. For instance, imagine there is a pallet of canned green beans on the loading dock at the grocery, but there aren’t enough workers to stock the shelves. In this instance, you have both excess supply and a lack of it, if you catch my drift.

There is more than a little bit of that happening in the economy right now.

For instance, according to the Bureau of Labor Statistics (BLS), there were 295K job openings in ‘transportation, warehousing, and utilities’ in February 2020 before all hades broke loose with COVID-19. Jobs 2020. This number has almost doubled to 575K in April 2022, the last report. Jobs 2022. That is a huge number of distribution jobs going wanting, just huge.

This makes me want to rewrite the old Willie & Waylon tune “Mammas Don’t Let Your Babies Grow Up to Be Cowboys,” Cowboys, to read:

Mamas, don’t let your babies grow up to be cowboys

Don’t let ’em pick guitars or drive them old trucks

Let ’em be OTR truck drivers and forklift operators and such

This too shall pass, as trucking schools are now back open and training new recruits. You have to remember, they were closed for a long-time during the pandemic. That created a shortage of this type of worker. While we might not be training enough of them fast enough, there is at least a pipeline now when there really wasn’t one this time last year.

Fifth, and finally, the ongoing war in Ukraine will eventually come to a conclusion. This will, or should, free up grain shipments and untangle energy supplies. No, things won’t get back to antebellum levels for a while. However, things will run slightly more smoothly as opposed to not running at all.

When you combine all of these things together, we are probably looking at inflation starting to ‘turn over’ by the end of the year…if not a little sooner. By turn over, I mean increase at a decreasing rate. From this morning’s 8.6% reading to perhaps a 5-5.5% observation by year-end. While still higher than anyone would like, at least inflation will be (or should be) more manageable.

Of course, this assumes the past is prologue, which I am supposed to say it isn’t for compliance purposes. However, I am old enough to know that those who don’t learn from history are doomed to repeat it.

In conclusion, try not to watch the news today. Don’t go online to do anything other than to check box scores or do the Wordle. Wordle. Put the phone down, and pick up a book. Go outside for a walk, and pour yourself a glass of your favorite libation when it hits 5 o’clock somewhere. Take a deep breath and remember “this too shall pass.”

It always does.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and thank you, as always, for indulging me this week.

John Norris
Chief Economist & Optimist



Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself. OCB Investment Committee