Has the Long-Awaited Softening Arrived?
Perhaps a bit in core goods CPIs
Are core goods CPIs finally softening?
The big question for tomorrow’s CPI release is whether it shows sufficient softening in goods inflation to offset the recent accelerations in services inflation to uncomfortably high levels—and where it tends to stick once reached.
In the real-time data, the general picture is of an accelerating core CPI (through the end of June) with a mildly softening core goods CPI—as illustrated by the two figures below. While far too soon to declare victory, it is a fairly benign picture on the goods side. Both real-time series have matched the official CPI-U releases fairly well for the past few months.
China’s Covid shutdowns
As we noted in Part I, tentative signs of a turning point in some goods CPIs earlier this Spring—in general merchandise via the bullwhip dynamic we’ve written about in previous posts—have reversed, with varying degrees of upward momentum.
This variation seems tied (at least circumstantially) to China’s COVID shut-downs in Q1 and Q2.
Products with a higher share of Chinese imports among total US imports and products with higher Chinese import penetration (market share position vis-a-vis domestic producers as well as other foreign producers) have exhibited a stronger bounce-back from the bullwhip discounts of early Q2.
Apparel and footwear in particular have shown notable strength in pricing after significant Q1 discounts while furniture—with a much lower Chinese import presence—has followed the same dynamics, but with more uneven dynamics in its CPI—a bit more topsy turvy, as illustrated in the figure below.
This suggests pass-through of the higher freight costs that followed China’s March shut-downs to products with significant upstream exposure to Shanghai factories, and perhaps at a higher rate where Chinese imports are overwhelmingly dominant (e.g. footwear).
June’s real-time Apparel CPI rose 0.84 percent over June and continues to accelerate into July. Judging by pricing, the inventory issues that plagued major retailers in late Q1/early Q2 have largely resolved, at least in softlines.
Footwear CPIs were also quite strong in June, illustrated here by our Women’s Footwear CPI (a category near and dear to this author’s heart).
By contrast, June’s real-time Furniture CPI was flat over June and continued to soften into early July.
Other general merchandise
Most general merchandise CPIs fall between these two categories, not as strong as Apparel, but a bit more upward pressure than Furniture. A few final examples of general merchandise CPIs—a bit in the weeds, but the detailed data can give a good sense of color and builds one’s understanding of broader dynamics:
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