Is the great economic surprise of 2024 brewing?
If inflation has once again been anathema after the pandemic, deflation (not disinflation, but a slowdown in inflation) has no longer been a taboo in the economic world. The sustained fall in prices and its negative implications have always put economic actors on alert. In recent times, the term alone has appeared associated with Chinese casuistry, precisely evidencing his lack of muscle after covid. However, the dreaded concept has suddenly been uttered again in the West. With the path of disinflation somewhat more on track after the aggressive increases in interest rates, it is precisely in the US – its inflationary rebound in this cycle began to make the rest of the world’s hair stand on end – where the taboo has begun to fall. The word has reached the end of the conveyor belt at the checkout of a hypermarket. Walmart.
It was this Thursday when the CEO of the American distribution giant, Doug McMillon, dropped the ‘bomb’. “In the US, it is possible that we will go through a period of deflation in the coming months,” McMillon told analysts at the conference after the presentation of quarterly results. The sensations transmitted, sometimes almost in the form of proverbs, by the big retailers are usually taken as a leading macro indicator as it is the best heart rate monitor for the American consumer, the true engine of the world’s leading economy.
It’s true that Walmart’s U.S. grocery and general merchandise prices are higher than they were a year ago, and have risen a lot in two years. But McMillon said the increases are slowing and could even begin to reverse. If that happens, Walmart shoppers could begin to see deflation – or a decline in prices – on dry groceries – such as pasta or converses – and consumables – everyday products such as toothpaste – in the coming months, He said. General merchandise prices “have come down a little more aggressively in recent weeks or months,” she added.
“Almost uniformly, consumers are putting pressure on prices“, he explained in a television program Bloomberg Gordon Haskett analyst Chuck Grom, citing Target and Macy’s, which have also reported results recently, among retailers feeling the pressure. Consumers have stoically endured the constant price increases, but their ‘rebellion’, so to speak, is materializing both in the purchase of fewer durable goods and in other alternatives with greater discounts or with changes in demand (substitute products). Also from Walmart, the financial director, John David Rainey, summed it up like this: “We are more cautious with the consumer than we were 90 days ago.”
“Walmart has reported that consumers refuse to spend when faced with price increases. This may signal the phase end of profit-driven inflation, which focuses on retailers and consumer brands. Customers are convinced that price increases are fair and margin increases are smuggled in. “When consumers realize that price increases are not, in fact, fair, it triggers a sharp change in behavior,” said Paul Donovan, chief economist at UBS GWM in his morning commentary.
The fact is that the mere mention of McMillon’s deflation was enough to create a buzz among economic analysts in the media and on social networks. Some market followers even saw reaction on Wall Street beyond the drop in Walmart stock. “Treasury yields took note and fell six basis points when Walmart’s CEO dropped the word ‘deflation’… While outright deflation may be a distant scenario, there is a risk that the swelling of inventories causes discounts related to the weakening of employment,” they point out from the manager NewEdge Wealth, alluding to the cooling that seems to be evident in a labor market which has been pointed out by the Federal Reserve as a source of inflationary pressures.
In a way, it was the perfect ending to a week with softer than expected CPI (Consumer Price Index) data in October –already at 3.2% and with a reading of 0.04% month-on-month, very close to deflation-, producer price inflation (PPI) also with positive news – it fell 0.5% in October, putting an end to the 0.6% month-on-month increases recorded throughout the third quarter – and a notable drop in oil prices. If some analysts, like those of INGthey already defended that the 2% objective would arrive next year, this sequence generated a perfect breeding ground for more than one to reinforce their theories.
Donovan himself, from UBS, has insisted in recent months that deflation of durable goods prices, using as an example the drop in the price of televisions, a product that was purchased on a large scale during the pandemic. Add to that now the pressure on profit-driven inflation. The UBS economist considers that the Fed has overextended with the pace of rate hikes having given an excessive importance to the inflation reflected by the CPI: “The reality of inflation is that middle-income American households face a lower inflation rate than the headline indicates and therefore have greater purchasing power than inflation implies. Regional variations “They also reduce the experience of inflation for many consumers. All of this supports a soft landing scenario.”
This restrictive desire of a Fed that has conspired to avoid the mistakes of the past is what gives rise to the veteran strategist of Société Générale, Albert Edwards, to wonder if the “big surprise” of 2024 will not be a “cyclical deflationary crisis”. In a note to clients a few weeks ago, Edwards addressed the issue: “The Federal Reserve appears determined not to repeat the mistakes of the 1930s, when it allowed the money supply to contract, or rather failed to react.” aggressively enough to counteract the decline. Many believe that this decline in the money supply was one of the main causes, if not the cause, of the Great Depression of the 1930s. Central bankers wouldn’t make that mistake again, would they? “.
“Former Federal Reserve Chairman Ben Bernanke is considered one of the leading experts on the Great Depression, even though his thesis on the subject does not refer to the credit bubble that preceded the collapse. But let’s not argue. At least He seems to have understood that the fact that the Fed allowed the money supply to shrink greatly contributed to this. In a mea culpa speech in honor of Milton Friedman’s 90th birthday, Bernanke came clean: I would like to say to Milton and Anna Swartz: ‘About the Great Depression, you’re right. We did it. We’re so sorry. But thanks to you, we won’t do it again.’ Yet despite the Fed’s assurances, they’re doing it again “Edwards writes.
Cyclical deflationary crisis?
The analyst focuses on the US M2 monetary aggregate, which includes the M1 aggregate (coins and banknotes in the hands of the public and bank reserves) and to this is added short-term deposits (up to two years), savings books, demand accounts and daily repurchase agreements that people have in the financial system. This aggregate is key to the extent that “it is used as an indicator of possible increases or decreases in inflation levels, since it is a broader measure of the money supply in an economy than M1, which only considers money in hands of the public,” IG analysts detail.
“We can see that the US M2 aggregate is contracting at the fastest rate since the Great Depression, but that is dismissed by many as a mere statistical whim – the case of Golman Sachs analysts. But as aggregate bank lending also begins to shrink for the second time since 1949 (the only other time being the Great Financial Crisis in 2008), it is surely time for the money supply ‘deniers’ at the Fed (and the ECB ) sit up and take notice,” Edwards continues. “I’m sure that if Milton Friedman were alive today, he would be again berating the Fed for its ineptitude. If the monetarists are right and this data is the prelude to a deflationary crisis (due to excessive Fed tightening), then the vast majority of investors seem completely and utterly unprepared,”
Morgan Stanley also points to durable goods deflation, which they predict will play an important role in the decline in the CPI in 2024. However, its analyst Ellen Zentner tries to offer some perspective. Her thesis is that price drops, even when the dreaded ‘d’ word is applied, can sometimes be beneficial. She’s not worried about the kind of widespread deflation that can wreak havoc on an economy. “The goods sector does not worry me at all. Goods prices in the US have been in deflation for decades until covid. It is normal, right? We imported a lot of deflation. But that is determined externally,” a program also outlined television of Bloomberg. More worrying would be, he warns, “a deflation scenario in the US for services”.
From Pimco, the large bond manager, analysts Tiffany Wilding and Allison Boxer see two reasons for falling inflation. “First, goods inflation could continue to moderate as China exports part of its deflation to the US, retail consumers become increasingly price sensitive and car prices continue to decline. Second, despite an extremely resilient and rising housing market for sale, we see some downside potential in the coming months in the rental market, and it is rents that are measured in US inflation reports. . “The supply of rental units has increased in several regions, which could put downward pressure on rents in 2024.”
In the investing universe, another common criticism of the Fed for excess, Cathie Wood, visible head of the disruptive investment fund ARK, has come out this week to repeat his recurring warnings:. “The Fed has gone too far, we’re going to see a lot more deflation in the future. If we’re right, and they’ve gone too far, they’re going to have to cut rates pretty significantly.” Wood predicts that the CPI could turn negative “sometime next year.”
The truth is that beyond the noise and signs, inflation remains above the 2% target and the Fed will need more clues to decide when to cut rates, and it is beginning to be quite clear that it is not going to raise them further. For now, it remains to be seen if the flight of deflation gains more strength or remains a joke on Wall Street until a new inflation reading comes that is stronger than expected. Some American financial journalists post with some irony on X (formerly Twitter) the hashtag #deflation in response to news such as that Thanksgiving dinner will cost less than last year. They have gone further from the financial site zerohedgewhere they have used the hashtag with the promotion launched by The Washington Post newspaper: a 90% discount on their subscriptions on the occasion of Black Friday.
