Think Inflation is High in the U.S.? Not Compared to the U.K. – Inflation in the U.S. has been the big story over the past two years. In March, the Consumer Price Index (CPI) posted a 5% year-over-year gain, a step down from February’s 6% year-over-year increase and marking the smallest increase since May 2021. For the Federal Reserve and many market watchers, this level of inflation is still way too high, even though it marks a drastic improvement from this time last year. It’s nothing compared to inflation in the U.K. – in March, consumer prices rose 10.1% year-over-year which was down only slightly from February’s 10.4% increase. The core rate of inflation, which strips out volatile food and energy prices, rose 6.2%, which is higher than the U.S.’s 5.6% core CPI increase (though not by much). Therein lies the key issue in the U.K. – food and energy. In the U.S., the energy component decreased -6.4% year-over-year in March, while in the U.K. energy prices shot higher by a staggering +40.5%. For food, prices were up 19.1% year-over-year in March, which was the sharpest increase since 1977. Contributing to the inflation problem are labor shortages in the U.K., which are being made worse by strikes (over high prices) and illnesses stemming from a hobbled health care system.1
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China’s Economy is Back in Growth Mode – China’s economy is coming back to life. In Q1, China’s National Bureau of Statistics reported that the economy grew by 4.5% year-over-year, nearly double the 2.9% pace set in the same period last year. Economic growth was largely driven by a surge in consumer spending, which saw retail sales jump by 10% in March. This uptick in consumer spending was the fastest pace in almost two years and is a clear signal that consumers are enthused to be out of China’s harsh zero-Covid policies. The shift to consumer spending also is encouraging for economists who had grown concerned that too much of China’s economic growth was being fueled by investment, which was essentially state-sponsored infrastructure and real estate projects. The transition was clear in the data: in March, the year-over-year gain in retail sales was faster than the increase in industrial production and fixed-asset investment, which it should be noted also increased nicely. Consumer spending at restaurants, for instance, grew 26% year-over-year. Generally speaking, what’s good for the world’s second-largest economy is good for broader global economic growth, but it’s arguably too early to infer that China’s growth rebound will be felt globally. Since a big portion of the growth was from domestic consumption, there may not be a significant effect on other developed countries.3
Transportation Stocks Have Been Underperforming – Sign of Future Economic Weakness? The Dow Jones Transportation Average – which tracks companies across the airline, railroad, and trucking sectors – has been underperforming the broader Dow Jones Industrial Average by nearly 7% since early February. This is a trend that warrants following – historically, transportation stocks have come under greater selling pressure than the broad market during periods of economic weakness, as demand for goods, materials, and travel falls. It may be that investors are selling off economically sensitive transportation stocks in anticipation of an economic recession later in the year. At the same time, however, investors have been rotating significantly into growth-sensitive tech stocks as interest rates (measured by the 10-year U.S. Treasury) have come down.4
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Disclosure
1 Wall Street Journal. April 19, 2023. https://www.wsj.com/articles/u-k-inflation-stays-above-10-raising-prospect-of-further-interest-rate-increases-11fe4e18?mod=djemRTE_h
2 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
3 Wall Street Journal. April 18, 2023. https://www.wsj.com/articles/chinas-consumers-give-economy-a-post-covid-boost-823b884e?mod=economy_more_pos3
4 Wall Street Journal. April 20, 2023. https://www.wsj.com/articles/drop-in-transportation-stocks-foreshadows-weakening-economy-fcf83650
5 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
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