Not all inflation is the same. Peter Boockvar, CIO of the Bleakley Advisory Group, has his finger on the pulse of business. And for about a year now, he has felt an inflationary heartbeat.
Peter, the author of The Boock Report, in which he flash-analyzes the latest economic data in handy, bite-sized e-mails per day, makes an important distinction between goods inflation and service inflation.
At Mauldin Economics’ Strategic Investment Conference 2021 in May, Peter stated that they had acted differently. Looking at service inflation (excluding energy) in the consumer price index, it showed that it averaged around 2.8% in the 20 years before the pandemic.
Source: Peter Boockvar
These services are the intangible things that you can’t put in your pocket but are still valuable: rent, health care, tuition, insurance, entertainment, etc.
Usually we expect their price to increase every year. Our only question is by how much.
Peter’s data says the answer is around 2.8% per year. Sometimes a little more or less, but rarely flat and never negative.
Take away the Great Recession, and the average is much higher. (Of course, your mileage may vary depending on where you live.)
Goods, on the other hand, are the material objects and substances that we buy in shops or have sent to us: food, energy, cars, furniture, toys, lawn mowers and so on. These prices vary more than we normally see in services and often go down as well.
The 20-year-old pre-COVID network showed no change at all when looking at the CPI core goods component.
Source: Peter Boockvar
If you never expected 0% inflation, now you have. But that’s only the case with goods – inflation in services has driven the entire consumer price index higher.
How do we explain this discrepancy?
Two key factors are China and globalization. Goods inflation turned into stability and often into deflation, just as China joined the World Trade Organization (2001) and began exporting cheap goods. But it wasn’t just China; At this point in time, globalized goods production really took off.
The reversal of this strong disinflationary influence is one of the reasons Peter expects inflation. It’s not entirely virus-driven; Globalization has slowed down for other reasons. But the pandemic hit the brakes even harder.
In early 2020, when China was basically closed, we saw how vulnerable these cross-ocean supply chains can be to events on the other side.
Meanwhile, staying at home renewed our demands for various physical things. When you can’t go to concerts anymore, you might buy better home electronics – or a bigger house, which means you (or your contractor) buy more building materials, tools, etc.
Now we are seeing a sharp rise in freight rates and container traffic. It’s not a coincidence.
The world economy has been optimized to deliver something else. Now suddenly has to satisfy new consumer preferences. That drives up prices.
In addition, in recent years many transport companies have gone bankrupt and the supply of transport companies has been reduced along the entire supply chain, thus increasing prices for the survivors.
If service inflation just continues as before and goods inflation rises above the 0% level that has existed for years, we should expect headline inflation to rise. However, there is reason to believe that service inflation will accelerate further.
Buying services really means that you are buying some type of labor.
- In a restaurant, the food itself costs something, as does the building. But a big part of the bill, perhaps most of it, is wages and tips for the cooks, bartenders, and waiters.
- In a hair salon or doctor’s office, you usually pay for professional time and expertise. There is a close relationship between service inflation and wage inflation.
Take a look at what has happened since last year.
The pandemic and the associated restrictions hit the service sector like a neutron bomb. The US government acted appropriately to help the millions who suddenly became unemployed. But, as is often the case, their methods were not targeted. This, combined with the new dangers and difficulties of personal work during a pandemic, reduced the labor supply.
With the recovery now underway, employers are again in need of workers and often have to pay higher wages to get them. That means even more service inflation, on top of the previous annual growth of over 2.8%.
Add in the inflation of the new goods and Peter doesn’t see how we can avoid a new inflation cycle. The question is how long will it take?
It looks like we’re going to find out.
I predict an unprecedented crisis that will lead to the greatest loss of wealth in history. And most investors are unaware of the pressure that is building up. Find out more here.