The Fireworks Are on Display

The 4th of July is one of my favorite holidays, and it is only a week away! It always brings back memories of boats on Long Island Sound, beach chairs, swimming pools, and, of course, firework displays. Recently, while lost in a daydream about past 4th of July experiences, a thought crossed my mind: do fireworks and economics have something in common? I'm not exactly sure how I arrived at this point, but let's explore the idea for a moment.

Imagine this: you hear the thump of firework shells being launched into the air. Bright red and orange rockets crackle and sizzle as they reach great heights before exploding in a vibrant display of red, white, blue, purple, and green sparks. These colorful embers gently cascade back to earth, gradually fading away, leaving behind a trail of smoke that dissipates into the night. This dazzling visual spectacle is bound to create lasting memories for years to come.

Now, why does all of this make me think about economics, and specifically inflation? When a firework explodes, the fragments often burst higher into the air before descending back to earth as they flame out. A similar phenomenon is occurring right now with inflation in the US. Think of each launched shell as representing a category of inflation: food at home, food away from home, energy, shelter, to name a few.

The May CPI statistics, released by the U.S. Bureau of Labor Statistics, made headlines by showing that the rate of inflation had slowed to its lowest pace in two years. While this may sound encouraging, a closer examination reveals that inflation still impacts several categories, and there is work to be done before the economy returns to a sense of normalcy. Let's delve deeper into a few of these categories.

Food

Food at home (e.g., groceries) and food away from home (restaurants) are two categories that have a significant impact on our daily lives. Supply chain issues, panic buying during the pandemic, and even a bird flu outbreak all contributed to higher prices for everyday groceries. The graph above illustrates that the inflationary firework for food at home reached its peak last summer and has been gradually tapering off since its vibrant display in August 2022. The May 2023 reading shows a considerable decline in year-over-year growth, with a rate of 5.8% compared to the 13.5% experienced last August. On the other hand, food away from home still experiences pressures, with inflation increasing +8.3% year-over-year in May. Running a restaurant today is more expensive than it was two years ago, with increased employee costs, higher ingredient prices, and rising rents. It is expected that the fireworks of inflation for food away from home will gradually retreat as consumers become more cost-conscious in the face of an impending recession, but for now, the embers remain bright in the sky.

Energy

Arguably, the most vibrant and explosive inflationary firework is energy inflation. It is the firework that elicits the most "oooo" and "aaaaaaa" moments throughout the entire show. I like to think of energy inflation as a "double-popper," where one explosion is followed by another explosion built within the first, just like those double-circle displays. The monthly YoY changes in energy inflation have taken us on a wild journey, and it is important to remember that energy prices are susceptible to external market forces, which can lead to dramatic fluctuations in the data. Think of these external forces as sudden gusts of wind pushing a firework off course or sporadic clouds muting the explosive and colorful display. Supply chain issues, the invasion of Ukraine, and other geopolitical influences contribute additional external noise to energy inflation. However, the winds are dying down, the clouds are dissipating, and the energy inflation data is showing positive signals as the colorful sparks gradually fizzle out in the night sky. But another shell could launch at any moment.

Shelter

Housing costs, whether buying or renting, continue to be the most significant expense faced by consumers. The May figures revealed a 0.6% rise in shelter prices and a year-over-year increase of 8%. These figures represent the fourth consecutive month of an 8+% jump in shelter inflation in this year alone. Since April 2021, consumers have been grappling with limited housing supply and inflated home prices. In March 2022, a rapid rise in mortgage interest rates compounded the issues in the U.S. housing market. Economists anticipate that the Fed's rate increases will eventually lead to a cooling off in home prices as we enter the second half of 2023. In another interesting detail, May 2023 saw the first YoY decline in average rents in two years (May was down 0.5% YoY), according to Realtor.com. Could shelter inflation be the quick-popping, bright firework traditionally signaling the finale is coming? We'll have to hang on a bit longer to find out, but the mounting evidence seems to affirm this notion.

In conclusion, the inflationary fireworks show may be the longest spectacle most of us have ever witnessed. The economic data currently available indicates that we are still waiting for the grand finale to burst into the sky, but it appears we are getting closer. So, don't fold up your blanket just yet. There are sure to be a few more firework explosions before this show reaches its conclusion.