U.S. service-sector inflation threatens commodity prices: Kemp



By John Kemp

LONDON, July 7 (Reuters) - Recent falls in commodity prices have encouraged expectations the U.S. central bank may be able to get inflation back under control without pushing the economy into a recession.

But this is almost certainly too optimistic because inflation in the services sector is running more than twice as fast as the central bank's target and will not decelerate just because goods prices stabilise or fall slightly.

Food and fuel prices are the most volatile components of the consumer price index, which is why the central bank tries to ignore them when assessing underlying or "core" inflationary pressure.

Prices for other durable and non-durable goods are also volatile and short-term changes can give a misleading picture of sustained inflationary pressure (Link).

But prices for services are much more stable and persistent, with changes driven largely by labour costs, and they account for more than 60% of total consumer spending.

Services inflation, measured by the price index for personal consumption expenditures (PCE), the central bank's preferred measurement of inflation, has been accelerating.

Service prices have risen at annualised rates of 3.0% over the last five years, 3.9% in the last two years, 4.7% over the last 12 months, and 5.5% over the latest three months.

PCE services inflation is running 2-3 times faster than the central bank's target of 2.0%, implying the economy must undergo significant disinflation to get back to the target rate.

BUMPY LANDING

In the five decades since 1970, the U.S. central bank has never managed to reverse a rise of services inflation of this magnitude without pushing the economy into some form of recession.

Even if the central bank is able to defy the precedent and engineer a soft-landing, a mid-cycle slowdown rather than a cycle-ending recession, the impact on employment and consumer spending is likely to be uncomfortable.

Since services prices are much more "sticky" than goods prices, achieving a modest slowdown in services inflation is likely to be accompanied by a much sharper downturn in merchandise prices.

This is one reason why commodities and energy prices have fallen so hard in recent weeks in response to the increasing probability of a recession or at least a business cycle slowdown.

As the U.S. Federal Reserve and other central banks raise rates to tame services inflation, suppliers of raw materials and manufactured products will be hit disproportionately hard.

The impact is evident in share prices of commodity producers, industrial machinery makers and manufacturers compared with services providers.

The U.S. S&P 500 equity index has been down by around 9% over three months from May to July compared with the same period in 2021. But shares in diversified manufacturer 3M are down 32% over the same period; Micron Technology, a semiconductor manufacturer, down 24%; and Caterpillar, a heavy equipment maker, down 15%.

Tumbling share prices for commodity producers, manufacturers and freight transporters imply traders expect a sharp downturn on the merchandise side of the economy.

Related columns:

- Global business cycle starts to turn down (Reuters, June 30)

- Diesel demand set to drop as economies enter recession (Reuters, June 23)

John Kemp is a Reuters market analyst. The views expressed are his own
Editing by David Evans

Disclaimer: Ang mga kabilang sa XM Group ay nagbibigay lang ng serbisyo sa pagpapatupad at pag-access sa aming Online Trading Facility, kung saan pinapahintulutan nito ang pagtingin at/o paggamit sa nilalaman na makikita sa website o sa pamamagitan nito, at walang layuning palitan o palawigin ito, at hindi din ito papalitan o papalawigin. Ang naturang pag-access at paggamit ay palaging alinsunod sa: (i) Mga Tuntunin at Kundisyon; (ii) Mga Babala sa Risk; at (iii) Kabuuang Disclaimer. Kaya naman ang naturang nilalaman ay ituturing na pangkalahatang impormasyon lamang. Mangyaring isaalang-alang na ang mga nilalaman ng aming Online Trading Facility ay hindi paglikom, o alok, para magsagawa ng anumang transaksyon sa mga pinansyal na market. Ang pag-trade sa alinmang pinansyal na market ay nagtataglay ng mataas na lebel ng risk sa iyong kapital.

Lahat ng materyales na nakalathala sa aming Online Trading Facility ay nakalaan para sa layuning edukasyonal/pang-impormasyon lamang at hindi naglalaman – at hindi dapat ituring bilang naglalaman – ng payo at rekomendasyon na pangpinansyal, tungkol sa buwis sa pag-i-invest, o pang-trade, o tala ng aming presyo sa pag-trade, o alok para sa, o paglikom ng, transaksyon sa alinmang pinansyal na instrument o hindi ginustong pinansyal na promosyon.

Sa anumang nilalaman na galing sa ikatlong partido, pati na ang mga nilalaman na inihanda ng XM, ang mga naturang opinyon, balita, pananaliksik, pag-analisa, presyo, ibang impormasyon o link sa ibang mga site na makikita sa website na ito ay ibibigay tulad ng nandoon, bilang pangkalahatang komentaryo sa market at hindi ito nagtataglay ng payo sa pag-i-invest. Kung ang alinmang nilalaman nito ay itinuring bilang pananaliksik sa pag-i-invest, kailangan mong isaalang-alang at tanggapin na hindi ito inilaan at inihanda alinsunod sa mga legal na pangangailangan na idinisenyo para maisulong ang pagsasarili ng pananaliksik sa pag-i-invest, at dahil dito ituturing ito na komunikasyon sa marketing sa ilalim ng mga kaugnay na batas at regulasyon. Mangyaring siguruhin na nabasa at naintindihan mo ang aming Notipikasyon sa Hindi Independyenteng Pananaliksik sa Pag-i-invest at Babala sa Risk na may kinalaman sa impormasyong nakalagay sa itaas, na maa-access dito.

Gumagamit kami ng cookies para mabigyan ka ng mahusay na karanasan sa aming website. Magbasa pa o palitan ang iyong cookie settings.

Babala sa Risk: Maaaring malugi ang iyong kapital. Maaaring hindi nababagay sa lahat ang mga produktong naka-leverage. Mangyaring isaalang-alang ang aming Pahayag sa Risk.