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Is Inflation Now a Tree Falling in the Forest?

The highlight of next week, not counting a Monday holiday of course, will be the August readings of business and consumer inflation at the end of the week – indicators that were closely watched before the COVID crisis.

But now, thanks to much more pressing issues this year, inflation was put on the back burner. Then Fed Chair Jerome Powell took it off the stove entirely in a speech last week, in which he suggested that price levels will be allowed to bubble up as much as needed to get the employment part of the dual mandate back on track.

Not that inflation was ever a sizable threat even before COVID-19 made its way to the US. But it has certainly lost any of its pep now, even with a small uptick from June.

Through July, core PPI was up 0.3% year/year, much slower than the 1.4% gain in February prior to COVID, itself a sharp decline from 2.2% in July 2019.

As for consumer inflation, July core CPI was up 1.6% year/year, down from 2.4% in February and 2.2% in July 2019.

The August data will progress in that same vein, with small overall and core increases that keep the year/year rates below their pre-COVID levels.

Further state reopenings drove demand in the month, but back-to-school and early Labor Day sales likely depressed prices for several items at the consumer level.

While virtual learning may have reduced the typical need for new clothes, it had little impact on the need for school supplies and actually increased the need for items like computers, desks and chairs, items that were priced to move by retailers.

Energy prices could post a modest decrease in the August data after gains in the previous three months. The impact of weather-related shortage concerns from Hurricane Laura will show up eventually, but the overriding factor for the August reports will be gasoline prices.

Pump prices are reported to be the lowest heading into a Labor Day holiday weekend in years at a time when seasonal adjustment factors will be looking for unadjusted prices to surge. The result will be a large drop for adjusted gasoline prices, and energy prices, especially at the consumer level.

The X factor is whether the resurgence of COVID cases in many states drove consumers back into isolation.

Unemployment claims lower their level, not their meaning

A shift in seasonal adjustment factors had a dampening effect on both initial and continuing jobless claims in the previous week’s data. The 881,000 adjusted initial claims level was the lowest since the COVID-19 pandemic began, and continuing claims fell by 1.238 million to 13.254 million, the lowest level since the April 4 week.

Add the Labor Day holiday into the mix, which will shorten both the processing time and the reporting period next week, and it is reasonable to expect that claims will remain near the current level for at least the next few weeks and likely longer.

Providing some offset to the shorter workweek next week is Hurricane Laura, which hit too late in the August 28 week to impact the data, but could be seen in the form of higher unadjusted claims in Texas and Louisiana.

No-one can argue that a reading over 800,000 per week is a sign of a booming jobs recovery, even though it turns out that the actual level is 15-20% lower than what we have been used to.

The August employment data released Friday morning showed that the job market continues to work its way out the hole it fell into during the shutdowns, with another payrolls gain of over 1 million and sharp drop in the unemployment rate to levels consistent with a normal, rather than highly abnormal, recession.

As of the August 22 week, there are over 13 million people receiving benefits this late into the pandemic. Even with recent jumps in payrolls, the job market remains a barren desert for many.

More elective procedures continue to support hospital PMI

Last month, the ISM released its initial public report on hospital economic activity, indicating significant expansion as more states allowed elective procedures to resume.

ISM released data back to August 2019 that showed, not surprisingly, a dip in April and May followed by solid gains in the two most recent months.

A further expansion of elective procedures, facilitated by less need for COVID-related resources in many (though not all) states, should continue to support strong readings for the index when it is released on Tuesday.

Treasury budget gap smaller, but still significant

The August Treasury budget to be released on Friday will be the first reading since the ending of the enhanced unemployment claims program on July 31.

The termination of that program, which cost $73.4 billion in July and $244.9 billion year to date, will substantially reduce the level of outlays. Add to that a calendar shift of early-August transfer payments into July and outlays should post a significant decline in the month.

Also, separately from Extract Analytics, the stocks outlook snapshot for the upcoming week suggests that the momentum and risk profile that preceded this correction was such that the S&P 500 should not embark on a sustained drawdown from here without first retesting its recent highs in the next 10-20 days. History does not always repeat, however.

Kevin Kastner

kevin@macenews.com

www.macenews.com

Julie Ros

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