Consumer Behaviour

What is ultimately the most important? Food.

 

Retail Sales Vs. Consumer Price Index

The retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce. It gives a monthly aggregated measure of sales of retail goods. So basically it gives the sales figure of what people bought the previous month.

If retail sales go up, it means people either bought more things, or prices went up for their goods or a combination of both. But I think retail sales are a good indicator of inflation.

The chart below clearly illustrates that retail sales are a leading indicator for the consumer price index, so everyone should monitor the retail sales numbers to get an idea on inflation.

Federal Funds Rate Vs. Consumer Price Index

From the first FOMC meeting lead by Janet Yellen, we noticed one important statement:

"The Fed Funds Rate will be kept low when inflation stays at this low level."

Thus, we chart the Fed Funds Rate against the CPI and get this result.

There is a strong correlation between the Fed Funds Rate and the inflation rate (CPI).

So we expect that an increase in interest rates will only happen when inflation starts to rise. The unemployment rate is not on the radar anymore.

Notice that historically the Fed Funds Rate is higher than the inflation rate (positive real interest rate (above 0%)), but today the Fed Funds Rate is lower than the inflation rate (negative real interest rate (below 0%))

Japan's stock market is about to crash

If you want ideas which investment to make in the coming months, I would expect a decline in the Japanese stock market.

First, we note that the 10 year Japanese bond yield at 0.6% is pretty competitive against the dividend yields of Japanese stocks at 1.8% (Chart 1). So stocks aren't such good value anymore compared to a year ago when dividend yields were at 2.8% compared to a 10 year treasury yield of 0.7%. Moreover, the P/E ratio of Japanese stocks is currently at 13, which isn't particularly cheap.

Chart 1: Japan: Dividend yield Vs. Treasury Yield

Secondly, I have written extensively about the dire fiscal situation in Japan. Japan has a current account deficit, is printing money to stimulate their economy and more and more of its interest payments on Japanese debt is financed by less tax revenue. Obviously, this won't be bullish for Japanese stocks.

But most importantly, recent numbers on the consumer confidence in Japan, point to a decline in the stock market for the coming months.

Read on here.

Consumer Sentiment Index Vs. S&P 500

There is a correlation between consumer sentiment and the forward P/E ratio on the S&P 500. Investors will be willing to pay increasing multiples if they are confident that the future streams of earnings are sustainable and forecastable.

If we know that forward earnings are a measure of how confident investors are to buy stocks compared to the earnings of the stocks, then we know that the forward P/E ratio is correlated to the S&P 500 itself. By deduction, the consumer sentiment index is correlated to the S&P 500.

The consumer index (blue chart) is a leading indicator for economic trends so if we see a drop in the blue chart, the red chart (S&P 500) will go down a few months later.

Consumer Price Index: The effect of a rise in oil prices

With crude oil going back over $106/barrel (which is a 20% increase from $90/barrel), let's see how the CPI would do.

As you know, the consumer price index consists mostly of housing (42%), then second comes transportation (17%) and last comes food (15%).

The crude oil is part of the transportation segment. One third of the transportation segment is motor fuel or 5% of the CPI.

So if oil prices go up 20%, the CPI will only go up 20% x 5% = 1%. 

More importantly, housing determines a major part of the CPI.  Half of the housing segment consists of Owners’ equivalent rent of residences which is basically the amount of rent you would pay for staying in the house. This depends on the housing prices. 10% of the housing segment is fuel and utilities. So if oil goes up 20%, the housing segment will go up 10% x 20% = 2%. And the CPI would go up 2% x 40% = 1%.

CPI

So basically, if oil prices go up 20%, the CPI at least goes up 2% from the fuel in the housing and transportation segments (if all else stays equal). The other segments will of course be influenced too by rising oil prices, but to a lesser extent.

So that's the significance of the oil price on the CPI.

Wage Inflation Vs. CPI

This page is created to monitor the Average Hourly Earnings of Production Vs. Consumer Price Index (CPI).

The Average Hourly Earnings (blue chart) are a good indicator for the Consumer Price Index (CPI) (red chart). 

It appears that the CPI is most volatile here, so the important trend to follow is the average hourly earnings.

Capacity Utilization Rate Vs. Consumer Price Index

This page is created to monitor the Capacity Utilization Rate Vs. Consumer Price Index (CPI).

When capacity utilization goes above 80%, the industry goes above a threshold where it lacks capacity to produce. At that moment the only way to rebalance is to increase prices.

When the capacity utilization goes above 80% (blue chart), the CPI (red chart) will follow suit after 1 year as capacity utilization is a leading indicator for inflation.

Correlation: Wage Inflation Vs. Unemployment Rate Vs. Consumer Price Index

There is an inverse relationship between the unemployment rate and the wage inflation. Whenever people get unemployed, it means the economy isn't doing well. Employers won't be able to raise wages of the people during these difficult times, so you will get a low wage inflation trend (blue line). In these periods, the unemployment rate tends to go up (yellow line).

Chart 1: Wage Inflation Vs. Unemployment Rate

The same can be said the other way round. When the unemployment rate declines, people will demand a higher salary as skilled workers get scarcer. At this stage the wages will inflate.

It is also so that wages correlate highly with the consumer price index (CPI). So if the unemployment rate declines, you can expect a higher CPI as you can see on Chart 2.

So if you don't believe the CPI the government is reporting, you just look at the average hourly earnings. The average hourly earnings were positive in March. So I expect the CPI to increase too.

Chart 2: Average Hourly Earnings Vs. CPI