Thanksgiving costs a little less this year! Yee...haw. Yes, it's true--the cost of a 10-person meal is down 4.5% from a year ago, according to the American Farm Bureau. But it's still 25% more expensive than it was four years ago, as Deutsche Bank points out.
This is a nice way into the recent debate over what matters more; the level of consumer prices, or their rate of change. I'd put it this way: you need both going down for consumers to show meaningful signs of relief. The fact that consumer sentiment has fallen for four straight months even as gasoline prices have declined is evidence enough of that. Consumers are basically demanding more price cuts across the economy.
And they're starting to get them. "It's not just energy prices that have already declined," notes Piper Sandler's Nancy Lazar. "2024 could see more and more deflation." Several categories have already seen prices decline to their pre-Covid trend. Household appliances, for instance, are only 3% above "normal" now, to the detriment of companies like Whirlpool, whose shares now trade at just over $100 versus $250 at their 2021 peak.
And it's not just "physical" items. Hotel prices are down sharply from their highs, and only 7% above their pre-Covid trend. Similar story for airlines. For all the talk of the shift to travel and experiences, the JETS airline ETF is actually down 3% this year. Mid-market Choice Hotels is only up 1%. Furniture and used car prices are down sharply too, although furniture still has to drop another 15% and used cars another 30% in price before we're back to pre-Covid trends.
There are also another half-dozen major categories where we haven't yet seen prices drop at all from their Covid surges. Soup prices are still up 29%. Cereal prices, 25%. Restaurant and prescription drug prices are up 13%. Men's apparel, 12%. Sporting goods, 11%. "What'll happen when grocers are [finally] driven to discounting?" asks Lazar. "They don't look ready for deflation." Investors already seem skittish; Campbell Soup shares are down 29% this year. Kroger is down 3.5%.
"Inflation is dead. Deflation is here," declared Natalliance's Andrew Brenner earlier this week. "It is just time before the markets recognize it." He noted the $2.96 per gallon he paid to fill up his gas tank, coupled with macro data points like plunging producer prices in Germany. "I suspect the Covid mean-reverting disinflation is going to last longer than many people think," was a similar warning posted later that day on X.
You can see this already playing out in bond yields. The two-year Treasury has dropped by half a point in the past month, to around 4.8%. The 10-year yield has fallen by even more than that, from 5% to just around 4.35%. The trouble is exactly as Nancy Lazar puts it: "Lower inflation will initially be good news for consumers, but bad news for corporate revenues, leading to weaker employment which would of course then be bad news for consumers."
So yes, hopefully prices have mostly stopped surging. But their decline back to "normal" could end up being just as brutal for the economy.
See you at 1 p.m!
Kelly
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