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From Inflation to Deflation: Is 2024 the Year of Change?
The release of US retail sales data and PPI on Wednesday further indicates that the economy is cooling down, with reduced inflationary pressure. While some may see a "Goldilocks" economy, others, such as Ark Invest's Cathie Wood and Walmart CEO, are cautioning about an upcoming period of deflation.
With the potential transition from inflation to deflation impending, many are questioning whether 2024 will be the year of significant change.
“In the U.S., we may be managing through a period of deflation in the months to come,” Walmart CEO Doug McMillon mentioned during the company's earnings call on Thursday.
"The Federal Reserve has gone too far; we're likely to experience considerable deflation in the future. " Cathie Wood, the head of ARK Investment Management said Tuesday.
1. US Retail Sales in October Plummet to Lowest Level Since March
With interest rates remaining at their highest level in 22 years, consumer loan and mortgage rates are also affected and U.S. retail sales fell again in half a year in October, down 0.1% from the previous month. Although the decline was smaller than economists expected, October's drop in retail sales suggests consumer demand is slowing at the start of the fourth quarter, which could lead to weaker prices.
Several analysts have warned that this decrease may be an indication of an economic slowdown due to rising borrowing costs and accumulating credit card debt, which are putting pressure on U.S. consumers and constraining their ability to spend.
Kathy Bostjancic, the Chief Economist at Nationwide, said "The report on retail sales in October confirms our belief that consumers' willingness and ability to spend is being restricted by slowing income growth, decreasing excess savings, and tight credit conditions."
2. The Pace of Food Inflation Slows as Prices of Staples Like Bacon, Seafood and Eggs Drop
As the largest retailer in the US, Walmart's CEO Doug McMillon said on Thursday that deflation could be on the horizon as prices for general merchandise and essential grocery items like eggs, chicken, and seafood decrease.
The most recent CPI report also indicates that of the 338 categories measured, 92 categories experienced a decline in a year-on-year price index. As shown in the figure below, eggs, airline fares, fuel oil and other fuels are falling sharply.
In terms of overall consumer prices, US Inflation experienced a general slowdown in October. While Bloomberg economists anticipate that the annual inflation rate will decrease from 3.2% in October to 2.7% next year, Cathie Wood holds a more radical forecast, predicting that the inflation rate may even turn negative at some point next year.
3. PPI Records Largest Monthly Decline Since April 2020 in October
In October, PPI, which reflects final demand, unexpectedly fell 0.50% month-on-month, the largest decline since April 2020, due to the drop in gasoline prices. This further indicates that inflationary pressures across the economy are weakening.
Walmart has indicated that some of the more persistent higher prices, such as pantry staples, may begin to deflate in the upcoming weeks and months.
Meanwhile, Cathie Wood has stated that a deflationary trend, which began with commodities, is now impacting airline and auto prices. She has long predicted a period of falling prices supported by emerging technologies like artificial intelligence, electric vehicles, robotics, genomic sequencing, and blockchain.
While deflation is good news for consumers, it can lead to slower economic growth. When consumers anticipate that prices will decline in the future, they may put off spending, which is a significant contributor to the economy. This results in reduced output and lower profits for corporations, decreased business investment, higher unemployment rates, and slower economic growth.
1. Related Sectors May Be Under Pressure
Analysts suggest that deflation is taking a toll on retailers such as $Walmart (WMT.US)$, $Target (TGT.US)$, and $TJX Companies (TJX.US)$, as they may face challenges in improving their business and margins. Also, Retailers are starting to issue warnings that this year's holiday season may not be as robust as in previous years, citing consumer caution.
However, if the shrink rates remain stable, retailers can adjust their prices accordingly to mitigate the downside risk to their business.
2.The Fed's Monetary Policy May Be Constrained
According to Cathie Wood, deflation across multiple industries in the US could compel the Federal Reserve to initiate a cycle of interest rate cuts.
“The Federal Reserve has overdone it, we're going to see a lot more deflation going forward; If we're right, and they've gone way too far, they'll have to cut fairly significantly.”
Source: CNBC, Yahoo Finance, Reuters, Trading Economics, Bloomberg
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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SpyderCall : Deflation = Lower prices = Less revenue = Lower earnings
intuitive Jackal_354 : if we're in deflation, the fed broke something and soon the market will crash
103902745 : so in deflation era, what's stock to buy? banking stock?
70883018 103902745 : Hint: In deflation, assets decrease in price.aybe $100 today will be as valuable as $90 in a year, maybe not. Whats a thing you can buy for $100 today and have someone promise to pay you $100 or more in a year?
103902745 70883018 : yup. those companies that hold more cash will be more valuable than those holding more stock. that's why I thought bank share will raise during deflation era cause they keeps cash and people repay them in cash.
so am I correct or wrong ?
70883018 103902745 : I don't think that banks really hold that much cash, but I like the way you think. Banks pretend to hold cash, but lend it to people on the promise that they'll be paid back the cash plus MORE cash in the future. That seems pretty powerful during deflation (the same way that financing everything during inflation can be profitable).
One risk for bank stocks is that deflation can depress the economy, leading to job instability and increased loan defaults. Also see "credit default swaps" and look at AIG, Bear Sterns, and Lehman circa 2008. If you are going to invest in banks, make sure you can read their balance sheets.