The doom and gloom parade continued this week and in some ways picked up steam. I heard one analyst say we might be talking ourselves into a recession, and I concur. That’s not to say there aren’t real issues facing the economy, namely inflation. But the worse the media portrays things, the more we change our behavior, and the greater the risk we collectively tank the economy. Next week the Federal Reserve will announce its next interest rate hike with everyone widely expecting a 0.50% increase. While they could surprise us with a larger hike, especially after the inflation data released today, it is unlikely they will. Make no mistake, these are difficult times and the Fed is far from taming inflation. Conservatively, we’re looking at elevated prices for many months to come.
Let’s talk about inflation since the report today was an unpleasant surprise. The Consumer Price Index (CPI) rose to 8.6% y/y in May, stronger than expected and a reversal of what we had hoped to be a declining trend. Prices for shelter, gasoline, and food were the biggest contributors and this is the problem. We’re not talking about durable goods like big screen TVs and washing machines. We’re talking about the items we all buy as part of our daily lives. Among the items which have had large year-over-year price hikes are groceries +11.9%, gasoline +48.7%, fuel/oil +106.7%, natural gas +30.2%, new cars +12.6%, and used cars +16.1%. These make it more expensive to drive to work, result in higher utility bills, and higher food costs just to name a few of the pinch points. Another part of inflation which hasn’t received as much attention lately is rent. While we’re all aware of the skyrocketing price of homes, you might not be aware that home prices are not a component of CPI. Instead, the Bureau of Labor Statistics (true story, I interviewed to work there as my first job out of college several decades ago) uses rental prices as a substitute. This week Redfin put out a report showing median monthly asking rent in the U.S. surpassed $2,000 for the first time, rising 15% year over year. Among those most affected are Austin, TX +48 (the largest increase on record of any metro area), Nashville, TN +32, Seattle, WA +32%, and Cincinnati, OH +32%. While demand may eventually subside for many goods and services, two parts of the inflation picture will remain sticky. Those include wages and rents, which is why inflation may not decline nearly as fast as the Fed had hoped.
Depending on your outlook, this next bit of news will either be great or it won’t. It seems consumer spending increased 9% in May, despite falling consumer sentiment. Credit card spending rose 16% as subprime delinquencies ticked higher. On a macro level, personal savings as a percentage of disposable income fell to 4.4% in April, down from 5.0% in March, and 12.6% in April 2021. Clearly, as inflation remains stubbornly high, consumers are spending more, doing it more frequently on credit cards, and saving less. It’s no wonder consumer sentiment is at a forty-year low and typically only seen during serious recessions. We’re a pretty unhappy lot these days.
Interestingly, healthcare costs which are mostly immune to consumer spending habits, are also on the rise. The median price of a new drug launched in 2021 was $180K per year. The highest priced new drugs were for rare diseases (median $263K) and oncology (median $155K). But perhaps more to the point, researchers from Brigham and Women’s Hospital wrote in JAMA that unadjusted mean launch prices have surged 20% per year since 2008. In that year, the average new drug launched was $2,115. They also found that more than 47% of new drugs introduced in 2020 and 2021 were priced more than $150K per year. I don’t know what the solution may be or even if there is a solution, but this trend of skyrocketing prices seems unsustainable.
In closing, I want to share perhaps the silliest story I’ve come across in a very long time. I read this past week where a California court ruled bees can legally be considered fish. I did a double-take and then decided this must be a hoax of some kind. Rest assured it is not a hoax. It seems the California Endangered Species Act was designed to protect “native species or subspecies of bird, mammal, fish, amphibian, reptile or plant.” However, there is a tricky loophole that was discovered. The Act defines a fish as a “wild fish, mollusk, crustacean, invertebrate, amphibian, or part, spawn, or ovum of any of those animals.” Do you want to take one guess what is an invertebrate? So, for the sake of the California Endangered Species Act, “fish” can indeed include bumblebees. The bumblebees in question are the Crotch bumblebee, the Franklin bumblebee, the Suckley cuckoo bumblebee, and the Western bumblebee. As for how they got their names, that will have to wait for another installment. Now you know.Bruce J. Mason, MBA