- David J Lynch
From chicken wings to used cars, inflation begins to ease its grip
But there’s still a long way to go before consumers feel much relief or the Federal Reserve hits its goal of a 2 percent annual price target
The price of gasoline is dropping like a rock. Chicken wings are suddenly a bargain. And retailers drowning in excess inventory are looking to make a deal. After more than a year of high inflation, many consumers are finally starting to catch a break. Even apartment rents and car prices, two items that hammered millions of household budgets this year, are no longer spiraling out of control.
Global supply chains are finally operating normally, as more consumers spend more on in-person services like restaurant meals and less on goods like furniture and computers that come from an ocean away. The cost of sending a standard 40-foot container from China to the U.S. West Coast is $1,935 — down more than 90 percent from its September 2021 peak of $20,586, according to the online freight marketplace Freightos.
The moderation in inflation is just beginning to appear in government statistics. In October, the Federal Reserve’s preferred price gauge, the personal consumption expenditures index, posted its smallest monthly increase since September of last year, and is up 6 percent over the past 12 months. The better-known consumer price index is rising at an annual rate of 7.7 percent, down from 9.1 percent in June.
“The worst of the inflation is behind us,” said Steven Blitz, chief U.S. economist for TS Lombard in New York. “The question is where does inflation settle?”
The Fed has been raising interest rates sharply since March in a bid to get inflation back to its 2-percent price stability target. Fed Chair Jerome H. Powell on Wednesday noted signs of progress, but said it was far too early to claim victory. Friday’s stronger-than-expected jobs report, which showed wages rising too quickly for policymakers’ tastes, only underscored the point. The central bank does not expect to reach its inflation goal until 2025.
“It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high,” Powell told an audience at the Brookings Institution.
Still, there are clear signs of improvement in merchandise prices, as consumers resume their pre-pandemic spending patterns. Excluding volatile food and energy prices, goods prices rose in October by 5.1 percent, down from a 12.3 percent annual rate in February.
But as goods prices begin cooling, pressure is building on services. Rising demand and limited supply — think short-staffed restaurants — has services inflation running at an annual 6.7 percent rate, more than twice the year-ago figure.
“The expectation is that goods prices will continue to disinflate. But services inflation will more gradually slow and will be much stickier,” said Kathy Bostjancic, chief economist at Nationwide.
Most of what is happening now with prices reflects developments in specific markets or consumers’ return to pre-pandemic routines. The plunge in ocean shipping costs, by itself, has stripped roughly 0.7 percentage points from the inflation rate, Freightos chief executive Zvi Schreiber said.
By making credit more expensive, the Fed has put a major dent in the housing industry. With mortgage rates briefly topping 7 percent recently, pending home sales in October were 37 percent lower than one year earlier, according to the National Association of Realtors. But the full effect on the economy of higher interest rates will take many months to materialize.
Either way, consumers are unimpressed. Less than 1 percent of those responding to a recent Census Bureau survey said they had noticed prices for goods and services declining over the past two months. And 15.7 percent of households said they find it “very difficult” to pay their routine household expenses, a figure that is virtually unchanged from the 15.9 percent who reported affordability woes in June.
To be sure, in a $26 trillion economy, prices on some products are always falling even as many others rise. In June, when inflation reached its highest point in more than 40 years, prices nonetheless dropped that month for bacon, window coverings and men’s sweaters, according to the Bureau of Labor Statistics. So it’s important not to exaggerate the recent improvement.
That said, the global economic backdrop has shifted.
With Europe and the United Kingdom in recession and China hobbled by its restrictive “zero covid” policy, global demand for oil has sagged. A barrel of Brent crude now goes for about $85, one-third less than in early March following Russia’s invasion of Ukraine. As a result, the national average price for a gallon of regular gasoline is $3.47, down almost 8 percent from one month ago, according to AAA.
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Many retailers find themselves with unusually high inventories, the result of two years of herky-jerky supply chains. But as shipping and raw material costs declined, companies such as Ikea recently began reducing selected prices. Tolga Oncu, retail operations manager for Ingka Group, Ikea’s corporate parent, told Reuters this week he was “quite optimistic” about being able to lower additional prices in the months ahead.
The company did not reply to a request for comment.
Walmart also said last month that it will be looking for opportunities to cut prices. Sam’s Club, the company’s warehouse membership store, recently cut the price of its in-house hot dog and soda combo to $1.38 from $1.50, undercutting rival Costco.
“Living with high prices through this year has a cumulative impact on our customers, especially for those that are most budget-conscious, and so we’re focused on bringing our costs and prices down as quickly as possible by item and category,” Walmart chief executive Doug McMillon told investors in November.
Chicken, cars and rents provide clues as to why forecasters expect inflation to ease in coming months, even if it takes years to return to the Fed’s 2-percent target.
Chicken prices spiked near an all-time high earlier this year. Covid restrictions on poultry plants coupled with an unexpected decline in the number of chicks hatching successfully led to a drop in supplies as demand was soaring.
“It just created a ton of price pressure,” said Matt Busardo, a market reporter for Urner Barry, a food industry information provider.
The situation reversed this fall, when production rebounded just in time for the typical seasonal decline in demand. The amount of chicken in cold storage jumped nearly 20 percent since May, according to the U.S. Department of Agriculture.
That’s created some bargains — at least for restaurants. Wholesale prices for boneless chicken breasts have dropped dramatically over the past six months, Busardo said. At Wingstop, a fast-food chain based in Dallas, executives said the cost of bone-in chicken wings fell by nearly 43 percent in the quarter ending Sept. 24.
“We have a favorable commodity outlook, not only for bone-in wings, but also for breast meat, which we believe will continue into early 2023,” Alex Kaleida, Wingstop’s chief financial officer, told investors October 26.
The company hasn’t lowered retail prices, but said it’s offering a new chicken sandwich for $5.29 and a combo meal of 20 wings and a large order of fries for $16.99 to share the savings.
After soaring in 2021, wholesale used car prices are down 15 percent from January, according to Manheim, an Atlanta-based automobile auction company. And those declines are starting to show up in prices paid by consumers, said Jonathan Smoke, chief economist for Cox Automotive.
New car prices will be slower to react. Dealers at the end of October had 1.56 million vehicles in stock, the highest figure since May 2021. That was enough to cover 49 days of sales, up substantially from one year ago but still well below the pre-pandemic figure of 86, according to Cox.
More ample supplies mean fewer customers are paying above the manufacturers’ suggested retail price, a common occurrence during the pandemic. The average new car sold in October for $46,991, which was $230 above the MSRP, according to Edmund’s, a car shopping website. In May, the average buyer paid $721 above list price.
Improving conditions in the new car market also are drawing buyers away from the used car market, which contributes to lower demand and falling prices on those lots.
“The used market has benefited from abnormal demand throughout the pandemic as a result of consumers being forced to buy used [who] could have or would have preferred to buy new,” Smoke said via email.
Apartment rents, meanwhile, after moving steadily higher all year, are finally cooling. The national average rent for a two-bedroom apartment is up 8.1 percent from one year ago, down from April’s 14.6 percent rate, according to Zumper, an online rental marketplace.
The change has been especially striking in cities such as Boise, Phoenix and Austin, which benefited as employees moved to take advantage of the work-from-home era.
“Rental prices are cooling off and cooling off faster than anyone ever expected,” said Zumper chief executive Anthemos Georgiades. “’23 is going to be a far more affordable year for renters.”
Real-time rental data takes months to show up in government statistics, Powell said in his Brookings speech. But it will start contributing to lower inflation readings next year, which explains why most forecasters expect a steady decline in inflation.
The Fed expects its preferred inflation gauge, the PCE index, to hit 2.8 percent by the end of next year, down from 6 percent today.