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Morning Report: Wholesale inflation rises


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Stocks are higher this morning after the European Central Bank hiked rates by 25 basis points and crude oil rose above $90 a barrel. Bonds and MBS are flat.

The European Central Bank raised its key interest rate by 25 basis points to 4%. It also signaled that it has wrapped up its tightening cycle: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB said in a statement.

Inflation in the Eurozone is 5%, which is much higher than the US. where PCE inflation is around 3.3%. Both the US and the ECB have a 2% inflation target. The Fed Funds futures continue to predict no changes at the September meeting next week and about a 40% chance of one more hike this year.

Inflation at the wholesale level rose 0.7% on a month-over-month basis, driven by higher energy prices. Gasoline accounted for about 60% of the increase. On a year-over-year basis, inflation at the wholesale level rose 1.6%. If you strip out food and energy, wholesale inflation rose 0.2% MOM and 2.2% YOY.

Retail Sales rose 0.6% in August, according to the Census Bureau. This was up 2.5% on a year-over-year basis. July’s numbers were revised downward from 1.0% to 0.7% (downward revisions seem to be a theme these days). These numbers are not adjusted for price changes, so it seems that consumer spending is waning as higher interest rates bite. The resumption of student loan payments isn’t going to help either.

The United Auto Workers will go on strike at 11:59 pm tonight if there is no agreement with the automakers. The UAW wants a 46% increase in hourly pay and a 4-day workweek (with pay for 5 days). Ford has offered 20%, while GM is offering 18%. The two sides remain pretty far apart. UAW President Shawn Fain said there would be “strategic strikes” which implies it won’t be a full-out strike against the automakers.

Regardless, in the short term a strike will be a damper for economic growth, however if the automakers accede to the UAW’s demands it will be bad news for inflation going forward as it will help cement the wage-price spiral.

Median household income fell 2.3% to $74,580 in 2022, according to the Census Bureau. This was driven by a 7.8% increase in the cost of living, which was the highest since 1981. The Census Bureau used a new inflation index as well, so past numbers might not be comparable.

The median house price to median income ratio sits at around 5.6x, which is an elevated number given how high mortgage rates are.

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