Consumer Price Index Takeaways

What should investors take away from the CPI report, and what is the latest on inflation data? Dryden Pence says that 3rd quarter earnings are going to be positive. The panel then weighs in on the sectors that are performing well and not so well in the current market conditions.

Nicole Petallides 1: (00:00)

Greg McBride is with us, Senior Vice President and Chief Financial Analyst at Bankrate.com, and Dryden Pence, Chief Investment Officer at Pence Capital Management. Thank you both for being with us. Greg, I’ll start with you. As you take a look at the CPI, and we’re waiting on the PPI for tomorrow, which is expected to pull back a little bit, your thoughts on inflation overall.

Greg McBride: (00:26)

Oh, it’s broadening out, Nicole. Over the summer, we saw an inflation print driven by things like used car prices and lodging away from home airfares. Now, those items are starting to pull back. What’s driving inflation now is food and shelter, the absolute necessities together. They accounted for more than half of the increase that we saw this month. CPI and those shelter prices in particular. I think what we see here is just really the tip of the iceberg. I mean, anecdotally, you’re hearing about tenants that get sticker shock in different parts of the country when their lease renewal comes up or if they’re looking for a new place. So I think that’s one we’re going to have to keep our eye on in the months ahead.

Nicole Petallides 1: (01:10)

We see inflation across the board. I mean, you talk about the pump, the flights, the rental cars, food … Dryden, your thoughts? I’m eager to hear what you have to say about this.

Dryden Pence: (01:23)

Sure. I think we realize that the supply chain disruptions are more extended than people expected, and inflation may be more real than people expected before. It’s not purely transitory. I think the one thing that we’ve got to really pay attention to is fuel cost. When you increase the price of a gallon of gas to the north of $4 in a lot of parts of the country, you’re going to see significant changes in behavior. That’s really cutting into the consumer’s ability to spend. So as we see those things, they will show up in the real economy. So we think that it’s a little more real than transitory at this point. It’s a question of both, and we believe that there’s some real inflation in this market, and it’s going take us probably six months to a year for these supply chain disruptions to work their way out. This is going to be with us for a little bit longer than everybody thinks.

Nicole Petallides 1: (02:14)

I saw an article about debt held by baby boomers and gen X-ers and gen Z and millennials. At this point now where do we stand when we look at consumer behavior? You get this feeling that household wealth has been higher and people are spending, mainly because of government stimulus, but at the same time, everybody has jobs. I mean, where do we really stand? Are people feeling better than they really are?

Greg McBride: (02:54)

It is still very much a K-shaped economic recovery. Much like the letter K, you’ve got one leg up where things are just getting better and better. There’s solid cash flow to that higher level of household wealth, and we see earnings and income rise. On the other hand, there is that down leg of the letter, K, where households still struggle mightily. In a recent poll, we found that 90% of households say that they’ve noticed higher inflation. Among those, about two-thirds said it’s hurting their personal finances. That kind of speaks to the point Dryden made a moment ago about the money that’s going into the gas tank. It’s not going someplace else. For all the talk about higher wages, the current price increases are outpacing the wages growth for many households. So, you know, their buying power is getting squeezed at a time when we’re still in economic recovery.

Nicole Petallides 1: (03:47)

Dryden, as the Chief Investment Officer, what’s your investment advice these days? Are you telling people to put money to work, move to cash, take some profits, or buy some dips in certain areas? And if so, where should they put their money to work?

Dryden Pence: (04:02)

We’re always a big favor of buying on dips because we think they will have some volatility. I think it’s going to level off here, but I think areas or sectors to pay attention to are companies that are involved in financial services; those kinds of companies that have made a lot of money off asset management are going to see continued revenue increases. We stay away from industrials that have very high labor cost inputs and very high commodity cost inputs. But, we also want to look at some technology companies that can be in the streaming space. They don’t have as many supply constraints.

Dryden Pence: (04:43)

Also, they have the ability rather than software, where they have more of an electronic digital environment than a physical environment. These disruptions are going to continue for a while. So companies that also manage their inventory very well are ones in the retail space. People are going to be buying stuff during the holiday season, and the locations that have inventory and have been able to manage through this are the ones that are going to have something to sell. A lot of people won’t.

Nicole Petallides 1: (05:09)

Greg, you mentioned the jobs picture and the wages in particular. Larry Fink of BlackRock today said one area of inflation that we see with this wage growth might never come back. That is because of how our nation has changed. We’re in a gig economy; these workers are not like the workers of our parents who had pensions and traditional benefits. Maybe those higher wages are really here to stay.

Greg McBride: (05:52)

Well, let’s just help people save some of it. Like you said, with pensions going away, the onus is increasingly on us as individuals, as it has been for the past several decades, to do our own saving for things like retirement. So with wages on the rise, there’s an opportunity maybe to put a little bit more into that retirement account and save for the future.

Nicole Petallides 1: (06:15)

Your final piece of advice, Dryden?

Dryden Pence: (06:27)

I think the thing is to recognize that we have to be patient through all these supply chain disruptions and not panic over big moves or whatever the Fed does or anything else. We need to recognize that there is a real economy; it’s going to take a while for everything to level itself out, but it probably will. So the big thing to do is not panic over the volatility that we will see, but be wise about where you deploy capital. Try not to get too far over your skis, and try to look at things that fundamentally are a little less disruptive from this next supply chain mess that we’re going to see for a while.

Nicole Petallides 1: (07:06)

Greg, a quick thought. People worry about the fact that we’re not producing the same amount of energy. Energy is on the rise. What will China do? The supply chain issues, and anything else cybersecurity. It’s not the end of the USA, right?

Greg McBride: (07:26)

I mean, you know, the resiliency of the consumer surprises time and time again,

Dryden Pence: (07:31)

Human beings are the most adaptable species on the planet. That’s why we’re at the top of the food chain. So all of these disruptions, we’ll get through.

Nicole Petallides 1: (07:42)

All right, Dryden Pence, Pence Capital Management, Greg McBride, Chief Financial Analyst at bankrate.com. And, of course, William Shatner went to space today. So what we’ll chalk it up as a good day.