Muted Inflation News Warns Of Potential Deflation Ahead

Last week, we saw both major monthly inflation reports come out, reflecting even lower rates than most pundits had expected. First, on Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose just 0.1% in May and 4% in the past 12 months. This is a massive improvement over April’s increase of 0.4% and annual rate of 4.9%. The core CPI, excluding food and energy, rose 0.4% in May and 5.3% in the past 12 months. Food prices rose 0.2% in May, while energy prices fell 3.6%. Owners’ equivalent rents were stubbornly high, up 0.6% in May from a 0.4% increase in April. This housing component does not accurately reflect lower housing prices. Overall, the May CPI reflected the lowest pace for consumer price inflation since April 2021, so the Fed was right to “pause” last Wednesday.

The Producer Price Index (PPI) declined even faster - down 0.3% in May and up just 1.1% in the past 12 months. This was the third drop in the PPI in the past four months, and a rapid deceleration from a +2.3% annual pace in April. The core PPI, excluding food, energy, and trade margins, was unchanged in May, while rising 2.8% in the past 12 months. Wholesale food prices declined 0.7% in May, while wholesale energy prices dropped 6.8%. Wholesale service prices only rose 0.2% in May after rising 0.7% in April.

As a result of these two reports, and other indicators, the Fed decided to pause hiking key interest rates further at its latest FOMC meeting last week, but the “dot plot” survey of FOMC members hinted at the possibility of two more 0.25% interest rate hikes later this year. At his press conference, Fed Chairman Jerome Powell said, “The committee thought overall that it was appropriate to moderate the pace, if only slightly.” Powell added that this “allows the economy a little more time to adapt as we make our decisions going forward.” Essentially, the Fed admitted that they do not want to do too much and thus kill growth.

Speaking of slow growth, the Atlanta Fed lowered its second-quarter GDP estimate to an annual pace of 1.8%, down from its previous estimate of 2.2%. The reasons cited by the Atlanta Fed for this downward revision included a lower personal consumption expenditure growth and government spending.

The best news released last week was that the Commerce Department on Thursday announced that retail sales rose 0.3% (month-over-month) in May, which was substantially better than economists’ consensus expectation of a 0.2% decline. Excluding vehicle sales and gasoline sales, retail sales rose 0.6% in May, which is a good sign of a resilient consumer. Fully 10 of 13 categories surveyed reported an increase in May as spending on building materials and vehicles picked up. Overall, May retail sales revealed some “green shoots” that signaled that consumers are still spending and the economic recovery is still active.

Energy News Reflects Summer Challenges Ahead

Goldman Sachs lowered its December price forecast for Brent light sweet crude oil last week to $86 per barrel, down from its previous forecast of $95. The Goldman Sachs research report said, “Significant supply beats from Iran and Russia have driven speculative positioning to near record-lows.” The report pointed out that, “After an initial sharp 1.5 million barrels per day drop, Russian supply has nearly fully recovered, despite the decision by many companies to stop buying Russian barrels.”

In its conclusion, the Goldman Sachs research said, “The extra Saudi cut and our expectation that OPEC+ will extend half of its April voluntary cut in 2024 will likely only partly offset these bearish shocks.” Clearly, Russia has been able to circumvent NATO sanctions.

Sadly, the war in Ukraine persists, despite the dam break. The tragedy of this war between Russia and Ukraine will hopefully result in a ceasefire in the upcoming months. In the meantime, the evidence that the Iranian drones have Chinese parts is putting more international pressure on China.

Long term, China is potentially risking lucrative international trade deals with the West, so China may continue to try to broker a peace deal. However, Ukraine started another offensive despite the dam break, so it will be interesting to see how long the fighting persists.

Toyota (TM) held its annual meeting last week, and many ESG advocates were pushing to oust its CEO, since the company is pushing hybrids and not making as many electric vehicles (EVs) as the ESG advocates demand. However, Toyota calmly informed its shareholders that there are not enough batteries available for the company to make a full transition to EVs now. In fact, there is a waiting list for Toyota’s redesigned Prius (which is utilizing a bigger battery pack) due to the shortage of batteries available.

Toyota will be the first company to launch a hybrid vehicle with a solid-state battery, since it wants to “stress-test” the solid-state battery, which traditionally does not cycle as much as lithium-ion batteries. I should also add that although Toyota utilizes lithium-ion batteries in the Prius, the company is shoring up its supply of lithium iron phosphate (LPF) batteries to boost its battery supply for other hybrid and EV models.

Jaguar Land Rover is recalling over 6,000 I-Pace EVs in the U.S. due to the risk of battery fires. LG Energy Solution has advised that I-Paces be parked outside due to the risk of battery fires. This battery situation with LG Energy Solution is almost identical to the problem with the first generation of the Chevy Bolt, where all the battery packs were replaced by LG Energy Solution. This is just one reason why auto manufacturers are increasingly switching to LFP batteries, even though they are heavier and less energy-dense. The simple fact of the matter is that LFP batteries are cheaper, more reliable, and do not catch fire.

It is important to note that LG Energy Solution has changed its battery chemistry on its second-generation lithium-ion batteries to utilize more nickel and less cobalt. This switch to the new lithium-ion battery chemistry is why GM has been slow to throttle up its EV production, since LG Energy Solution is its primary battery supplier. VW Group (OTCPK:VWAGY) (includes Audi and Porsche) and other auto manufacturers are also switching to LG Energy Solution’s new lithium-ion battery chemistry. The fact of the matter is that all the EVs with LG Energy Solution’s first-generation lithium-ion batteries are depreciating fast due to reliability issues. For example, I had an Audi e-tron that needed a couple of its LG first-generation lithium-ion battery packs replaced after 23,000 miles. It will be interesting to see if LPF batteries eventually replace lithium-ion batteries in EVs in upcoming years due to reliability and fire-risk issues.

Finally, one of the most disturbing stories emerging from Europe is that Ireland’s Agriculture Minister is considering killing 200,000 cows to reduce methane emissions and comply with the eurozone’s goal to reduce greenhouse gas emissions by at least 55% by 2030. Killing 200,000 cows would cost the Irish economy $640 million. The proposal from the Agriculture Minister is to start thinning the herd by 65,000 cows per year for three years and reduce the national dairy herd by 10%.

Yikes! I feel sorry for the dairy cows and recommend you buy Irish butter before it becomes scarce.

Beef prices have risen around the world due to the drought in the Midwest, which caused farmers in Canada and the U.S. to thin their herds. The higher cost of feed also caused farmers to thin their herds. Grain prices also surged last week due to the dam break in Ukraine. Perhaps a better solution is for Canada and the U.S. to sell “cow emission reduction credits” to Ireland to save their dairy cows.

Navellier & Associates owns Volkswagen Ag. (VWAGY) in managed accounts. We do not own General Motors (GM) or Toyota Motor Corp. (TM). Louis Navellier and his family own Volkswagen Ag. (VWAGY) via a Navellier managed account. He does not own General Motors (GM) or Toyota Motor Corp. (TM) personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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