🐝 Why Prices Still Sting

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What’s on the Menu 🍴

Economic data can be hard to digest…

Which is why we’re breaking down some important metrics in today’s Daily Dough!

Let’s get it:

• Economic Data Relieves Markets 📊

• Volatility’s Boom & Bust 💥

• Why Prices Still Sting 🐝

Today’s newsletter is a 5 minute read.

Economic Data Relieves Markets 📊

It’s been a monster week of economic data.

With a very data dependent Federal Reserve, it’s got the market wondering if this week will give them enough information to cut rates.

Let’s dive into all of the data and how it may affect the interest rate decision next month.

Inflation:

Inflation ticked down to 2.9%. A continuation of the trend lower driven a lot by shelter cooling.

Our very own Travis Devitt discussed this exact point a lot over the past year in our Wealth Building Community.

Retail sales:

Retail sales soared above expectations up 1%. This was a big report as the future of the stock market and potential recession depends on consumer spending.

While this is a good report, you have to dig in a little to figure out a few nuances.

First, a lot of the gain came from auto sales (+3.6%). However, even ex-auto and gas, the retail sales number was still positive.

It also appears more people are spending on staples over discretionary categories still.

This is a trend that we started to see late last year into 2024 and it continues to show strong.

Simply put, this report is not showing that the consumer is falling into recessionary spending territory yet.

Jobless Claims:

Initial and continuing jobless claims have both ticked DOWN this month.

This is a good sign overall that the labor market is not continuing to deteriorate.

It’s clear the stock market is feeling relieved.

In the latest stock market update in our community, I talked about the possibility of a “V-bottom bounce”. That seems to be playing out.

Macro data seems to be giving the Fed what it may need for a cut in September, but, it may only be 25 basis points.

I still think the Fed will be afraid to “spur inflation” again as the consumer isn’t quite weak enough … yet.

Volatility’s Boom & Bust 💥

The first three trading days of August started off with a bang, as global markets sold off and the volatility index (ticker: VIX) exploded higher.

And then almost as fast as the market correction started, it was over.

The recent collapse in market volatility has been historic:

The VIX has cooled back down at a record pace.

But why?

One big reason for the initial VIX spike was the rapid strengthening of the Japanese Yen and the unwind of the “carry trade”.

The carry trade unwind only lasted a couple days however, and the Yen strength has waned.

The Bank of Japan also came to the rescue by calling off interest rate hikes until the market calms down.

Another major factor in the market selloff was recession worries.

This week’s solid economic data has soothed investors fears in the short run.

But unlike a carry trade reversal, recession fears can linger for long periods of time.

We think that investors are likely to remain focused on the economy for the rest of the year.

We wouldn’t be surprised to see some negative reactions should weaker economic data pop up again.

The Federal Reserve’s interest rate path will also be an ongoing wild card.

So while it’s great to see the market calm down after the early August panic, we may not have seen the end of volatility in 2024.

Why Prices Still Sting 🐝

Inflation is like that sneaky friend who keeps showing up to your party, uninvited, eating all the snacks, and then sticking around way too long.

But just because inflation isn’t wreaking as much havoc as it did last year doesn’t mean your wallet feels any better.

That’s where disinflation and deflation come into play, and understanding these concepts can help you make sense of why things still feel so tight financially, even if the news says otherwise.

Understanding the Scoop on Inflation

Let’s break it down with an ice cream analogy—because who doesn’t love ice cream?

• In Year 1, a scoop costs $1. Sweet, right?

• By Year 2, inflation has doubled the price to $2, a whopping 100% increase.

• Come Year 3, that scoop now costs $3, but here's the kicker—the inflation rate has slowed to 50% compared to Year 2.

So, while the price is still climbing, it’s not rising as fast as before. This slower rate of price increases is what we call disinflation.

Now, disinflation is not to be confused with deflation, which is when prices actually drop.

Imagine in Year 4, that ice cream scoop goes down to $2.50.

That’s deflation, and while it might sound great at first—who wouldn’t want cheaper ice cream?—deflation can be a sign of deeper economic troubles, like falling demand, which can lead to job losses and a sluggish economy.

Why Disinflation Still Hurts

Even with disinflation, people feel the squeeze because prices are still going up, just at a slower pace.

It’s like getting hit by a car that's now going 30 mph instead of 60 mph—still painful, just not as catastrophic.

The government might tout falling inflation as a win, and technically, it is. But if your wages aren’t keeping up with even that slower rate of inflation, it feels like you’re treading water, or worse, sinking.

So, when you hear that inflation is “cooling,” remember it’s all relative.

The price of your ice cream is still rising—just not as quickly as before—and that can still put a serious dent in your budget.

Food For Thought 🧠

"A nickel ain't worth a dime anymore.”
- Yogi Berra

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.