Elevated inflation, particularly in food and energy, is taking up a greater portion of consumers’ disposable income which can lead to a slowdown in overall demand and negatively impact corporate profitability.
The Consumer Price Index (CPI) accelerated 9.00% year-over-year in June. This increase was driven primarily by higher food and energy prices. Food prices moved up 10.43% year-over-year while energy increased 41.54% year-over-year. The acceleration in prices for essential items will likely have a negative impact on demand as consumers adjust their spending.
Last week’s retail sales release highlights a slowdown in consumer spending. The headline number increased 1.00% month-over-month and 8.42% year-over-year in June. However, this data is reported in nominal terms. Adjusting for inflation, real retail sales came in at -0.32% month-over-month and -0.53% year-over-year in June. It is the fourth consecutive negative year-over-year print for the series.
Amid consumer spending weakness, inventories have been building at a record pace over the last seven months. The Producer Price Index (PPI) has also been accelerating during that period. For the month of June, PPI increased 11.19% year-over-year. This means businesses have amassed a significant amount of expensive inventory right as demand has started to ease. It’s also important to note that PPI has accelerated faster than CPI, meaning companies have not been able to fully pass on the increase in costs.
Slowing revenue has led to a build in inventory while input costs are rising which puts downward pressure on profit margins. This is a developing problem that will likely garner more attention as companies report earnings for the second quarter.
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Senior Economic Analyst
Boyd Watterson Asset Management, LLC