Inflation is Embedded in the Economy
I’m not buying that inflation is coming down in any meaningful way. Just in the last week, I got notifications from my accountant, my storage unit, and also trash pick-up that they are all substantially increasing prices. While gasoline prices may have come down after that June peak, inflation has become ingrained and I think businesses and services are at the point where they know they have to raise prices (or that they can get away with raising everything, citing inflation). All three cited inflation as the reason for price increases, and they know as well as I do that clients don’t really have an option to just, say no, to price increases.
And you know what the worst part is, just because crude came down slightly, it isn’t going to change my trash bill – or any of these others. For example, last quarter, the trash company charged me an extra $65 for ‘fuel surcharges,’ then this quarter, they removed the ‘surcharge’ and then just raised the price of the service by 50%. So, you know what that means right? It means that now that they took the ‘fuel surcharge’ off, and just changed the price, nobody can complain that ‘gas prices came down and therefore they shouldn’t charge extra.’ It also means there is zero chance they are going to lower the price next quarter, even if fuel charges are lower.
So, when I say inflation is embedded, what I mean is that just because commodity costs like fuel have come off, it doesn’t mean that businesses and services are suddenly going to celebrate and lower your bills.
The trash bill is just one example, but it’s happening everywhere. Food, utilities, services, the price of goods, and so on and so forth. If anything, businesses are probably behind in price increases and those that are just now raising prices have probably been feeling the brunt of it for months. Either that, or they just saw their own bills getting increased everywhere and determined they would raise theirs. Now, I’m the last person to begrudge capitalism, but we still have to realize what that means.
It means that businesses and services aren’t going to suddenly cut prices just because of falling gas prices. That means CPI can’t and likely won’t fall in a meaningful way until or unless demand is substantially reduced. And even then, maybe they won’t. Since when do utility bills go down?
Unfortunately, in examples like those I mentioned, like trash pickup – what are you going to do? Start burning your own trash? Light everything on fire in my storage unit? I suppose I could, but you get my point.
Higher than expected inflation is bad news for the market because Wall Street was so convinced that because gas prices have come down, it would demonstrate that CPI is coming off in a meaningful way. But, since the number came in higher than expected, the S&P dropped an immediate 125 points during the pre-market session and has continued lower throughout Tuesday’s trade. As of this writing, it’s clinging to the key psychological value of 4,000, but market internals have been weak all day.
What this result means is that last week’s oversold bounce is dead in the water. And, September is right back on track.
A higher-than-expected CPI reading is bad news for the market, unless you’re a bear. As of now, most of the short sellers got squeezed out from what I can tell and the indexes are right back at resistance again and in a very bearish overall stance. CPI set us up for the next leg lower. Tech, semis, and mega-cap stocks are all weak right now and barely hanging above the lows of the year. Those go, so goes the Nasdaq, down to new yearly lows. Not much is looking strong, beyond XLE, solar and consumer staples. Beyond that, shorting high beta tech is my primary focus right now. But honestly, the buys are very very few and far between, minus the oversold bounces / short squeezes. The path of least resistance is down, and that is where I remain focused.
Want to learn more? Join me in the Free Trading Room on Wednesday, September 28th for the kick-off into Q3 Earnings Season. Stay tuned for more information coming soon!