July 15, 2023 | CPI, PPI, Real Estate Market, AT&T and Transitioning into Retirement

CPI
If I told you last year we would see inflation at 3%, would you believe it? In the month of June that is exactly what we saw as the CPI rose 0.2% compared to May and it was up just 3% compared to last June. Energy prices continued to be a major positive as they fell 16.7% compared to last year with unleaded regular gasoline falling 27.1%. Other areas of the economy also saw nice declines with airline fares falling 18.9%, major appliances were down 10.7%, and used cars and trucks saw a decline of 5.2%. Food still saw an increase of 5% in the month, but there was a substantial difference between food away from home as it was up 7.7% and food at home was only up 4.7%. Grocery price inflation saw a peak of around 14% last summer so prices have slowed quite substantially with products like eggs (-7.9%) and bacon (-10.1%) showing nice declines compared to last year. Core inflation which excludes food and energy still remained higher than most would like to see at 4.8%, but it did fall from last month’s reading of 5.3% and it is well below the peak last year of 6.6%. As a reminder the headline CPI reached a peak of 9% last year. It is important to understand shelter prices continued to weigh on the report as they were up nearly 8% and accounted for approximately 70% of the monthly increase. I continue to believe shelter costs will decelerate substantially which would be a major benefit to both core and headline CPI. I think as we close at 2023 inflation will be a concern of the past.

 

PPI
The Producer Price Index (PPI) was even better than the CPI report as it showed positive signs for cooling inflation. In the month of June, the PPI was up just 0.1% compared to last year. In June 2022, the PPI showed a huge increase of 11.2%. Energy prices provided a major benefit to the report, but even core PPI, which excludes food and energy, was up just 2.6% compared to last year. As I said after the CPI report, I just don’t see inflation being a problem as we exit this year.

 

Real Estate Market
In recent data from the National Association of Realtors it was found the nearly 40% of Americans between the ages of 25 and 44 who bought homes last year plan to stay in them for 16 years or more. This sounds problematic given the current lack of inventory, but over the next 5 years I believe many of these survey respondents will change their minds. This mainly stems from life changes like marriage, having kids, and even divorce. On the other side I do not believe interest rates will remain this high on mortgages and we could see rates settle around the 5% level. While I believe they will not fall back into 3% range, it is much easier to give up your 3% mortgage for a 5% mortgage instead of trading it in for a 7% mortgage, especially if you’ve outgrown your current residence. The real estate market is very strange right now, but I believe with time it will normalize.

 

AT&T
AT&T has seen its stock price struggle over the last few years and it could get worse. On Monday, July 10 in the Wall Street Journal there was an article from their investigative reporting team titled “Telecom Giants Left Behind Miles of Toxic Lead Cables”. It was on the front page and two full pages in the first section discussing how AT&T and other telecom giants have left behind a network of cables covered in toxic lead that stretches across the United States under the water, in the soil, and on poles overhead. Unfortunately, I know what follows which will be a number of lawsuits from legal firms across the country. We believe over the next six months or so as the company defends itself against these lawsuits it probably will have to cut the dividend and there could be a decline of at least 20% or more in the stock price. This company had such a bright future in the next six months as other expenses were falling off and their cash flow would increase. We now see the same future for AT&T as what 3M has been going through over the last couple years with their stock price cut in half and they will have to pay out billions of dollars in settlements. In today’s society, lawsuits continue to mount costing businesses of all sizes from small to large hundreds of billions of dollars in settlements and legal fees. Until there is more clarity on this situation I could not recommend a buy on this stock.