Behold, Immaculate Deflation May Be Near

The US food industry may be heading into a period of deflation after three years of punishing price hikes that have caused sticker shock for shoppers at the grocery store.

“We may see dry grocery and consumables start to deflate in the coming weeks and months,” Walmart CEO Doug McMillon said last week.

Walmart, the largest retailer in the United States and to which groceries make up more than half of its sales, could enter “a deflationary environment,” McMillon said.

Food prices have increased 25 percent since the pandemic started. And they rose 3.3 percent annually in October from a year ago, according to the latest reading from the Labor Department. But prices on some staples such as bacon, seafood, and eggs have dropped. Prices on appliances, phones, airline tickets, and toys have also dropped.

Deflation would be welcome news for shoppers because it means lower prices. But it could also pose a threat to the economy, because falling prices can indicate weak demand, and consumer spending is a big portion of the economy.

If you think prices will go down in the future, you may delay making a lot of purchases today. When many people start to think that way, people spend a lot less money. That causes employers to lay off workers and can put an economy into a recession.

It’s also a lot harder for central banks to get an economy to grow if it slips into a period of deflation versus inflation. The Federal Reserve has been raising interest rates to cool the economy down.

Thanksgiving Relief

The number: $61.17

The cost of the typical Thanksgiving feast for 10 people, the American Farm Bureau Federation estimates, is a 4.5 percent decline from last year’s record price tag but still 25 percent higher than in 2019. The main comfort for families this year will be lower turkey prices than last year.

The Era of Continuous Price Hikes May Be Behind Us

Shoppers, who had restrained purchases of discretionary items due to rising prices for essentials, are now witnessing a slowdown in inflation across various categories, impacting retailers and potentially dampening sales growth.

Walmart reported a 4.9 percent increase in U.S. comparable sales for the three months ending Oct. 27, with a slight deceleration from the previous quarter. While groceries and health products boosted sales, general merchandise, including apparel, home items, and toys, saw a decline.

Although prices remain elevated compared to pre-pandemic levels in many goods categories, some retailers are feeling the impact. Target, for instance, reported a more than 4 percent decline in third-quarter revenue, with weakness across most sales categories except beauty. The average price of everyday items at Target fell about 3 percent in the recent quarter compared to the previous one.

This shift marks a departure from the trend of retailers and manufacturers benefiting from sales growth driven by price increases in recent years. Companies had touted their ability to raise prices as a sign of product strength, but economic cooling and consumer financial challenges have changed this narrative.

Analyst Simeon Siegel notes, “The days of proudly talking about price increases are behind us. It’s no longer the badge of honor it once was.”

Rising Optimism

With inflation decelerating, there is rising optimism about the Federal Reserve achieving what economists refer to as "immaculate disinflation" – a term likened to miraculous control over price increases without a significant rise in unemployment, a feat considered nearly miraculous.

During the inflation surge in 2022, there were concerns that a recession might be necessary to curb it. The concept of "immaculate disinflation," essentially synonymous with a "soft landing," gained attention in February 2022 when Financial Times columnist Martin Wolf warned against expecting an "immaculate stabilization" of inflation. By March, J.P. Morgan Chief Economist Michael Feroli also used the term, emphasizing the challenge ahead.

By the summer of 2023, it became clear that inflation was on a rapid descent, and that the economy remained robust. However, top government economists refrained from declaring victory, acknowledging that unemployment had slightly increased.

While recognizing the need for a modest economic slowdown to return price increases to normal, Fed officials, including Chair Jerome Powell, expressed satisfaction with the progress in managing inflation without the typical rise in unemployment seen in similar rate-hiking cycles.

Powell said during a news conference on Nov. 1, "We’ve been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate-hiking cycles like this one."

Deflation is primarily observed in the "goods" sector, constituting tangible items in Americans' purchases, and accounts for around a quarter of the consumer price index.

The strength of the U.S. dollar is a significant driver of this deflation, making imported goods more affordable. Mark Zandi, Chief Economist of Moody’s Analytics, highlights that some of these cost savings are passed on to consumers. Additionally, as manufacturers shift production to lower-cost regions, consumers may experience long-term savings.

Certain prices, including airfares and eggs, have seen declines from record highs. Notably, egg and airline ticket prices have dropped by about 22 percent and 13 percent in the past year, respectively, based on CPI data. However, the broader trajectory of prices and the extent of continued deflation remains uncertain.

Andrew Hunter, Deputy Chief U.S. Economist at Capital Economics, suggests that sustained declines are typically limited to specific items, stating, “Only certain prices are likely to decline.”

Big Savings in Shipping

According to Statista, the global freight rate index, a measure of the average cost of shipping a 40-foot container on 12 global trade routes, stood at over $1,700 in August 2023, a sharp decline from the peak of over $4,000 in May 2022.

With lower diesel prices and decreased freight rates, the shifting landscape has companies cautiously approaching the holiday season, which for many retailers is the biggest sales period in the year.

For shoppers, that trend could mean lower prices than last year and deals later in the season as retailers seek to avoid a glut of unsold merchandise.

The average price of food, beverage, beauty, and other everyday items fell about 3 percent in the most recent quarter compared with the previous one, said Christina Hennington, Target’s chief growth officer, earlier this week.

“The relief could spur more discretionary spending,” she said. However, the inflation over the years in food, household essentials, pets, and babies will “take a while to overcome.”

Reshoring and FDI News in Mexico

Reshoring, also known as 'friend-shoring,' is anticipated to be a significant driver of economic growth and increased chemical demand in Mexico and the broader Latin American region.

Foreign direct investment (FDI) in Mexico is expected to surpass $40 billion this year.

A substantial portion of these investments originate from Asia, particularly from countries like China, South Korea, and Japan. These companies are establishing joint ventures, making acquisitions, and constructing new facilities in Mexico for export, particularly to the US, leveraging the country's free trade agreements with various regions.

The surge in FDI is transforming industrial infrastructure in Mexico, with demand outpacing the construction of industrial parks, warehouses, and manufacturing plants. The trend towards reshoring and 'friend-shoring' is not only benefiting Mexico but is also positively impacting other Latin American countries experiencing increased foreign investment and trade.

Mexico, due to its proximity to the US, is poised to be the primary beneficiary of reshoring efforts in Latin America. The northern region of Mexico, where real estate prices have surged, is a focal point for these developments, particularly in sectors like automotive, aerospace, general manufacturing, and food processing.

US investment in Mexico is expected to continue, with the concept of 'slowbalization' gaining traction. Morgan Stanley identifies Mexico as a major beneficiary of this shift, citing geographical proximity and political alignment as key factors.

The report suggests that if the US aims to reduce its dependency on China, Mexico is a strategic choice for nearshoring. This shift could lead to the development of new ecosystems in Mexico's existing manufacturing hubs.

Morgan Stanley's research paper estimates that Mexico's manufacturing exports to the US could increase from $455 billion today to around $609 billion in the next five years, reinforcing the country's position as a crucial player in reshaping global supply chains.

San Luis Potosi is a Hotspot

During the first nine months of 2023, the Mexican state of San Luis Potosí secured the third position for the highest cumulative investment in the automotive industry.

San Luis Potosí attracted US$1.6 billion, constituting 10.5 percent of the total investment recorded in that period, according to Directorio Automotriz.

SLP's investment figure trailed behind Nuevo León, which accumulated US$6.1 billion, and Coahuila, with US$3.3 billion. Guanajuato and Chihuahua followed with accumulations of US$879 million and US$663.2 million, respectively.

SLP saw 10 new investment projects related to the automotive sector during this timeframe, with seven associated with electromobility. These initiatives resulted in the creation of 7,980 new jobs and the development of 2.95 million square meters in construction areas.

In the third quarter of 2023, Coahuila reported a total of US$1.6 billion from 12 new projects, while Nuevo León documented 11 projects amounting to US$480 million.

Otscon and BorgWarner emerged as key investors in Coahuila, with Otscon specializing in the production of safety parts like handbrakes and brake/accelerator pedals, and BorgWarner focusing on electric motor development.

The report did not include Tesla's investment in Santa Catarina, as the official amount has not been confirmed by the company. However, estimates suggest it could be as high as US$5 billion.

In other investment news in Mexico:

Volkswagen Will Produce Electric Cars in Puebla

Holger Nestler, the company's president in Mexico, said in an interview with Forbes Mexico, that an initial $750 million US investment will be on environmentally friendly production processes, making facility updates and incorporating cutting-edge technology to develop new models in the next one to three years. Of that initial investment, $350 million will be allocated for a new paint shop. The second investment package, yet to be disclosed in the coming months, will involve a substantial amount of money and will reveal the specifics of the electric model to be manufactured in Mexico. Nestler said the company will define the electric model within the next 12 to 15 months, and that it will be designed for markets of Mexico, the United States, and Canada.

The LEGO Group Announced a $205 Million Investment

The company said it would build a new 59,000 square meters warehouse, set to be the world's largest, at its Cienega de Flores complex in Mexico.

The facility, scheduled for completion in 2025, will employ 900 people and house 42 production lines, including 36 pre-packaging lines for paper bags and six final packaging lines.

In addition, Nuevo León has attracted $42 billion in foreign investment, encompassing 203 projects (104 new and 99 expansions), expected to generate 250,000 new jobs.

Meanwhile, in Chihuahua, Jabil inaugurated a $50 million manufacturing plant in the Chihuahua 2000 Industrial Park, covering 250,000 square feet and creating 2,000 jobs. The facility will focus on producing items for the energy, automotive, healthcare, digital printing, and retail sectors.

Bombardier Recreational Products Opens Third Facility in Juarez The new plant, dedicated to the production of jet skis, snowmobiles, and all-terrain vehicles, is expected to create over 2,000 direct jobs and has the capacity to manufacture 20,000 vehicles annually. BRP currently employs more than 8,000 workers in the state of Chihuahua, which has attracted $4.5 billion US in foreign investment over the past two years with the initiation of about 100 capital investment projects. Chihuahua is the largest of the 31 Mexican states, or estados, and is located in northern Mexico bordering Texas and New Mexico.

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