April Consumer Prices and Real Earnings

KEY DATA:  CPI: -0.8%; Over-Year: 0.3%; Ex-Food and Energy: -0.4%; Gasoline: -20.6%; Ex-Energy: -0.2%.  Food at Home: +2.6%/ Real Hourly Earnings: +5.6%; Over-Year: +7.5%

IN A NUTSHELL:  “Though most consumer prices fell, supermarkets did manage to push through some pretty hefty price increases.”

WHAT IT MEANS: It should be no surprise that when the economy shut down, prices fell.  And in April, that is precisely what happened.  Household expenses cratered, led by a massive drop in motor fuel costs.  Excluding food and energy, consumer costs were down by the largest amount ever.  The decline was only the ninth in the sixty-three years the series has been in existence.  With people not able to shop around, supermarket prices jumped.  Most distressingly, the prices of bakery goods soared.  However, Wawa has been running specials on my new favorite breakfast nuggets, Entenmann’s Pop’ems, so I was okay.  Restaurants that were open for take out managed to push through increases, though it is hard to criticize them for doing that as their sales collapsed.  On the goods side, alcohol, appliance and home furnishings prices soared but clothing and most medical supplies, excluding prescriptions of course, declined.  As for services, most travel related prices cratered.  However, our wonderful cable and satellite operators jacked up prices.  People were stuck at home so it was time to stick it to them. 

It is becoming clear from the data that the people being clobbered by the shut downs are low paid workers. Inflation-adjusted hourly wages skyrocketed.  Did worker wages really soar?  Not really.  But if you take out the bottom of the wage distribution, you wind up with a higher weighted average wage.  That wages were up so much implies that much of the loss of jobs were predominately in the lower wage segments of the economy.    

IMPLICATIONS:  Consumer prices fell sharply in April, but the decline looks a lot more positive on the surface than in reality.  The majority of the drop came from energy.  Excluding energy, costs fell modestly.  When you are living on savings and unemployment, the key expense is food, and that was where prices surged.  Gasoline prices have stabilized and are starting to rise, so the May report should look a lot different.  It will be interesting to see what happens to prices once the economy reopens.  Will firms try to recoup lost revenues by raising prices or will they try to attract customers back by running sales?  Supermarket weekly circulars have shrunk dramatically and a lot of products are being sold at full price.  Will that be sustained?  I doubt it.  On the other hand, I would not be surprised to see restaurants raising prices in an attempt to make up for their lost sales.  Once workers start commuting again, gasoline prices are likely to rise.  But ultimately, it will be how households shop that will matter.  Goods that require some form of in-person sales have been able to raise prices, as the inability to comparison shop has been limited.  That advantage will likely be lost with increased mobility.  But now that people have a better handle on internet shopping for a greater variety of products, those goods that can be readily comparison shopped online are likely to see a permanent increase in demand.  So the shopping patterns that emerge from the shut down will determine if inflation accelerates or decelerates. 

As for investors, the markets are back to where they were in the last quarter of 2019.  I keep asking the same question: Are earnings estimates the same now for 2020 and 2021 as they were toward the end of last year?  The only way that can be is if you believe in the Big-V recovery scenario.  Most of my colleagues have abandoned that forecast.  Most are now looking for a short-term sharp pick up in growth followed by an extended slow to moderate period.  That doesn’t argue for strong earnings growth over the next 12-18 months.  More importantly, the level of activity is now well below what was expected at the end of 2019.  The consensus is for a decline in the current quarter by 25% to 30%.  Assuming a 25% annualized drop, GDP would be about 7.5% below the level posted in the last quarter of 2019.  To get back to the previous peak, the economy would have to average a 3.9% annual growth pace for two full years.  Is that possible?  Hard to see.  For example, even if growth were 5% in the first year, it would still have to be over 2.8% in the second year. And then, total economic activity would only reach the fourth quarter 2019 level in spring 2022!  So, are the earnings forecasts that have to underlie the current market prices realistic?  I don’t know, but investors seem to think that is possible.