There is a whole host of goods rising in price, as proved by U.S. consumer prices hitting 30-year highs with 5.4% growth year-over-year.
What makes sense? The COVID - 19 pandemic and the policy response of lockdowns and government stimulus unleashed a massive switch in spending from services to goods. Spending on U.S. durable goods was 26% above its pre-pandemic trend in March.
A 26% limited demand for durable goods cannot be satisfied by a modern manufacturing sector that utilizes just-in-time supply chains and excess spare capacity! As a rising demand met relatively fixed supply, the price of durable goods went back to the current 11% above its pre-pandemic trend, said Dhaval Joshi, the chief strategist of BCA Research Counterpoint.
The surprise however has been the cost simplicity of services. That, Joshi explained, is because it wasn t a classic demand shock. There was no point in companies lowering prices because their customers couldn t get those services anyways. Meanwhile, statisticians continued to record the seemingly unaffected price of eating out or going to the theater, even though most restaurants and entertainment venues were closed, he said.
There s one notable country that didn't require shutdowns or lockdowns : Sweden. Now inflation in Sweden is 6% lower than inflation in the U.S.
What the Swedish experience suggests is that prices will eventually stabilize. The core demand for durables is increasing. Since March, it is already down 15% but needs a further 7% decline to reach its pre-pandemic trend, which we fully expect to happen. After all, there is so many smartphones and used cars that one can buy, Joshi said.
As for services, there are two forces : the wage rises as a result of the low price of goods but the hybrid force of home and office working, which will make it difficult for services spending to reach its pre-pandemic trending.
Joshi recommended a underweighting durables-heavy consumer discretionary sector, underweighting commodities that haven't sharply corrected versus those that have, and staying overweight U.S. Treasury bonds versus Treasury-inflation protected securities.