Inflation pops while demand drops

It’s the worst of both worlds [Click to view in browser](. Good afternoon, Markets felt the Fed needed a little ‘spice’ in their monthly meeting. [Hot Sauce Kc GIF by Kim's Convenience] That’s why they dropped the ‘stagflation’ bomb this morning with high inflation and low demand. Wait, what??? Yes, stagflation is in the air. A word that conjures up images of Japan in the 1990s (and Narnia if you’re a nerd). Economists define stagflation by three metrics: - High inflation - Low/stagnant demand - High unemployment Thankfully we don’t have the third one. But the Producer Price Index (PPI), which measures inflation for business inputs, rocketed up 6.6% over the last 12 months - the fastest increase on record. Month over month, the PPI rose 0.5% compared to estimates of 0.5%. And then we got retail sales…. May saw retail demand flop -1.3% versus estimates of +0.6%. So, that sucked. Digging into the details Goods inflation jumped 1.5% compared to services at 0.6%, which has been on par for the pandemic. When you exclude food and energy, PPI rose 5.3% over the last 12 months. As you might guess, commodities took the blue ribbon with grains surging 26.4% month over month (which is insane), natural gas for utilities up 33.1%, softwood lumber up 20.6%, crude petroleum up 12.8%, and so on. However, there is a bright spot, though not from this data. Lumber prices plummeted in the last couple of months, with lumber futures dropping from over $1700 to $970 per 1,000 board feet (MBF) Even copper dropped from $4.90 to $4.35 per metric ton. These steep declines at least show heavily overbought markets normalize as supply comes online. We’ve even seen housing demand abate some as homebuyers just say no to higher and higher prices. On the retail side, total sales dropped 1.3% month over month and excluding automobiles, sales dropped 0.7%. Building materials and garden supplies dropped the most, down 5.9%. The only major positive numbers were food services and drinking places up 1.8% along with clothing and accessories up 3.0%. Our hot take Trying to pin down the exact numbers is a fool’s game right now. Reopening economies and spinning up supply chains increases the volatility of the measures. We aren’t going to reach any stable point for months. However, the Federal Reserve, like the markets, will look for trends in the data. And right now, the inflationary pressures are undeniable. But, the recent collapse in some commodity prices could prove them right in the coming months. Until then, keep an eye on the averages, not the individual readings. For even more insights into the financial world, check out some of our publisher content below covering a wide array of topics. 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