If you have been reading my updates for a long period of time you will remember my earlier Spring posts where I have shared weather predictions from my grandfather who was a farmer. While he passed away in 1965, Grandpa had some pretty good observations related to rule of thumb about many things. One was potatoes needed to be planted by Good Friday. That did not happen in Minnesota this year, we still had 12 inches of snow. Another is corn needed to be knee high by July 4. The genetic modifications in seed corn makes this saying obsolete, knee high by Memorial Day is more like it now. On April 14 we had our first thunderstorm here in Central Minnesota. Grandpa would say, “The first frost of the year trails the first thunderstorm by 6 months.” Mark your calendars, Let’s see how close we are to the first frost being October 14.
The March inflation figures are interesting. The level of core inflation, the increase in prices, less gasoline and food costs, rose .4%. This includes hard goods, services, shelter and other consumer goods. This is still too hot but has moderated from earlier months. A good sign in the core inflation was that rents rose by the smallest percentage in over a year. There is a clear expectation that rental rates, shelter in the inflation calculation, will turn negative in the next couple of months, pushing the core inflation to a lower level.
The overall inflation rate bumped up only .1%. This is the core inflation rate plus the price changes in food and gas. Food prices have moderated in many instances pulling the overall inflation rate lower in March. A temporary drop in gas prices in March assisted in the lower rate. Sadly, in the last two weeks gas jumped by roughly 25% due to the OPEC announcement. Looking forward we can expect the gas price increase to have a huge effect on the inflation rate in April.
As we have experienced since 2020, the level of the money supply is directly correlated to prices. As the money supply increases, prices will rise. The Fed of course sets the money supply. Outside of funding our debt levels with cash, our banking system can also build or reduce the money supply by the amount of loans that are provided, or, conversely with loans that are repaid. The money supply in the US peaked in December of 2021 and has decreased moderately until the last month. On March 15, 2023 the level of commercial loans in the banking system peaked. In the last month commercial loans have dropped by 2.4%, the largest drop in loans ever in such a short period, outside of the PPP repayments.
The banks are reacting to the drain off of deposits in the banking system. As we enter a period of disintermediation, where banks have insufficient resources to fund loans, we will see a continuation of a the tightening of credit. Between the money supply contraction, the higher interest rates, dearth of new lending and consumers becoming more cautious in spending, our economy risks falling into a significant recession, not a soft landing as previously predicted.
Retail sales in March clearly indicate that the consumer is pulling back. Core retail sales fell by .8% in March which pulls out the impact of auto sales. This is one of the deeper cut backs that we have seen since the pandemic. At the same time, retail inventories are rising, reflective of the consumer reducing spending.
As manufacturing and service sector activity contracts, there is less demand for core production products. This has led to deflation in the producer price Index. The March PPI fell by .5%. The drop should help with future consumer prices, however, deflation can be devastating to a company’s well being. We really are between a rock and a hard place right now.
Have a great week.