With the release of the CPI index today it showed that consumer prices rose more than forecast today which continues to push the cost of living higher for the average consumer. The release also completed our composite price index model which, as shown in the chart, has now pushed the headline gauge above levels which normally have begun to impact the economy. Of course, this is already consistent with the recent reports we have seen lately from the various Federal Reserve regions but also in the continued negative outlook of small businesses as shown in the NFIB survey yesterday.
Most importantly, we have been discussing as of late how rising input costs will ultimately begin to impact corporate earnings if they are unable to be passed along to the end consumer. With stock market analysts late to the “earnings revision” party there is substantial risk in equity assets particularly in light of the perceived risk of the lack of monetary support from the Federal Reserve.
While core measures of inflation still remain fairly suppressed, consumers, who are faced with uncertainty about job security, stagnant wages and rising prices at the grocery store and gas pump, are curtailing their spending. This is turn puts more pressure on businesses, and as detailed in the NFIB report yesterday, who still rank “poor sales” as their primary concern. This is also why they, small businesses, see this as a “poor time to expand” their business which in turns keeps hiring down and unemployment at stubbornly high levels.
While Ben Bernanke hopes that the temporary softness in the economy is due to the Japanese earthquake, the reality is that the economy was also beginning to show signs of weakness and the disaster in Japan only exacerbated the issue. In fact, what we are seeing here is demand destruction, which as we have argued as of late, is that the consumer and the “balance sheet” recession remains in full swing. All of this translates into a “slow bleed” economy where as the government continues to try and patch up economic wounds with temporary band-aids, the real problem will ultimately be the slack by the consumer to drive final demand.