It's a 'Same-ish' Inflation Story

We're still waiting on 'peak inflation'... It's a 'same-ish' inflation story... Revisiting the trouble on the tracks... American railroads are called to the principal's office... Video: An era of global turbulence...

Same-ish story, different month...

If you're hoping for a crystal-clear sign that we've hit "peak inflation," the best thing I (Corey McLaughlin) can say today is... Keep hope alive.

This morning, the U.S. Bureau of Labor Statistics published its April Consumer Price Index ("CPI") report. And not 15 minutes later, our Stansberry NewsWire editor C. Scott Garliss published the full details in our free news service...

The U.S. Bureau of Labor Statistics' CPI data for April jumped 8.3% year over year ("YOY") compared with Wall Street's expectation for an 8.1% gain and the prior month's 8.5% increase. On a month-over-month ("MOM") basis, those same numbers rose 0.3% compared with the expectation for a 0.2% bump and below March's 1.2% gain.

We can debate the details of the data and whether we should even believe that numbers like those from the CPI are really the most accurate measures of inflation. But we can get good directional readings from looking at the same measure every month...

The CPI, for example, measures the prices paid over time in the U.S. for major baskets of goods, like housing, food, transportation, travel, and medical care... The Social Security Administration uses a subset of the CPI to determine its annual Cost-of-Living Adjustment.

You want the good news or the bad news first?

I'm feeling generally chipper today – aside from the seasonal allergies giving me brain fog and headaches (help me, Doc!) – so here's the good news...

The CPI numbers covering April show the first easing of YOY inflation in eight months. That's what people were hoping to see.

But the bad news is the decline was tiny... and less than what Wall Street analysts were expecting. Premarket gains in the futures markets turned to losses after the numbers were released around 8:30 a.m. Eastern.

And probably the most important point is that one month of a 0.2% annual decline in one inflation report does not make for a trend that screams inflation is going down quickly. Though if you are interested in inflation going down, it's better than last month...

Here's a multiyear chart of CPI readings...

High inflation isn't going away tomorrow... nor is the Federal Reserve's policy agenda to attack inflation, at the expense of economic growth... nor are the realities that businesses and people are facing today, like higher costs.

Also, if you look a little deeper at the MOM "core" (minus food and energy) CPI numbers, you'll see that they show inflation actually rose a little more from March to April than it did from February to March... and rose over 6% annually.

So while headline inflation rose a little less compared with this time in 2021 ‒ slightly off a 40-year record ‒ enough items still rose in price when compared with the previous month.

All in all, the inflation story hasn't changed yet. As Scott wrote in the NewsWire today...

While these numbers showed the pace of gains has eased compared with March, the change is marginal. In fact, the core numbers grew worse on a MOM basis. Prior to the release, the markets were rallying on short covering. But following these numbers, it's likely stocks could come under pressure once more.

In the parlance of Federal Reserve Chair Jerome Powell, it's a "same-ish" story... Appropriately, the major U.S. indexes continued to slide today, with the tech-heavy Nasdaq Composite Index down more than 3%... the benchmark S&P 500 Index off 1.6%... and volatility high again.

Expect market volatility, recession fears, and high inflation to continue in the months ahead... as folks contemplate the unclear future of prices... global supply chains... and war. Speaking of...

Let's revisit the 'trouble on the tracks'...

Regular readers will recall that a few weeks ago we reported on the mystifying supply-chain problems facing American railroads – specifically with the fact that Union Pacific (UNP) asked fertilizer companies to cut the amount of shipments sent via its rails by 20%. Union Pacific also said it was reducing the number of cars it ran too...

That's just one example of the problems within the industry... like a shortage of workers... cost-cutting... higher prices for customers... jammed-up tracks... and more shipping delays at what might be the worst possible time for the country.

Considering the railroads are considered "common carriers," under federal law… and the industry is obligated to provide "reasonable service at a reasonable rate upon a reasonable request from a shipper," we've got a big problem on our hands...

Our story, in response to a question from subscriber Mark W., generated a bunch of feedback... and we mentioned that there was going to be a government hearing on the issues later in April. Well, that hearing – over two days in Washington, D.C. – happened.

Executives from the major American railroad companies – including Union Pacific, BNSF, CSX (CSX), and Norfolk Southern (NSC), as well as a few Canadian companies too – were called before the Surface Transportation Board ("STB") to discuss the many complaints that have been filed against the railroads lately...

You can watch the whole thing – titled "STB Hearing on Urgent Issues in Freight Rail Service" – for yourself here if you want. I watched parts and made a few notes and observations, which I'll get to momentarily...

We've been meaning to get to this post-game report, but frankly, the whole slow-motion stock market crash over the last two weeks has kept our attention in the Digest fixed elsewhere. Still, it's an important story...

In short, the STB – a federal agency in charge of regulating railroad and trucking companies, among other "surface" things – is paying more attention now to what's really going on...

What we heard...

Deputy Secretary of the U.S. Department of Agriculture ("USDA") Jewel Bronaugh testified that, in recent months, rail complaints have "grown in number and urgency" and noted that unfilled grain-car orders from farmers are the highest on record. She said...

Poor rail service has halted the movement of grain.

And she added that agricultural shippers are paying thousands of dollars extra per car – a 50% to 100% increase in costs – if they can even get one to pick up their goods. And she said she has even heard reports that other producers – unable to get grain for their animals – were preparing to "depopulate" their livestock because they were so close to not being able to feed them. Bronaugh continued...

That is something a farmer should never have to do... Efficient and reliable rail service is essential. When railroads charge unreasonable rates and provide poor service, farmers struggle to make ends meet, consumers pay higher prices at the grocery store, and the United States becomes less competitive on the global market.

We also learned of a telling example about the inefficiencies of the railroad industry today...

Carl Bentzel, a commissioner with the U.S. Maritime Commission, said there was a 21% jump in "intermodal container shipments" through major ports last year. "Intermodal" means those big giant containers that can be taken off a cargo ship and put onto another mode of transportation, like a tractor-trailer or railroad car.

But he said railroads have not been able to keep pace or take advantage of this growth, actually reducing "intermodal" shipments by 16.8% last year. Meanwhile, Union Pacific's annual report showed only 3% revenue from intermodal shipments. As Bentzel said...

This is stunning. Think how much revenue was left on the table. Think how much could have been made if they'd broken even or increased market share. But even more than this issue, think of how smoother and more efficient the supply chain could have run if maritime surges had been matched by rail efficiencies.

To that point, Bentzel said that for a week "at the height of the volume surge" last year – when container ships were anchored off the U.S. West Coast with nowhere to go (and dragging anchors over oil pipelines, in at least one case) – Canadian railroad companies picked up the slack...

Indeed, an executive from one Canadian company said late in the hearing that they added service from the West Coast of Canada to Chicago, for instance, because U.S. companies couldn't keep up with the demand at Western ports...

If you're interested in some more of the hearing's details, Jeff Berman, an editor at the Logistics Management and Supply Chain Management Review publications, has a good recap here as well.

In his story, he notes Rob Benedict, representing the American Fuel & Petrochemicals Manufacturers, pointed the finger directly at the railroads' Precision Scheduled Railroading ("PSR") practices as the primary reason for today's problems.

Some of you told us the same thing in your feedback to us in our mailbag a few weeks ago... Thank you for that.

As Berman noted in his reporting, investment firm Morgan Stanley (MS) has jumped on this story too and published a research note on the hearing... We can see why...

A disconnect between the rails and Wall Street...

The merits of PSR – which is essentially a concept designed to boost railroads' "operating ratios," i.e., better efficiency with fewer costs, and largely implemented industry-wide in 2017 – should be a central part of this story moving ahead.

The idea behind the system is to basically run freight trains on a fixed schedule... to maximize profits, and run longer trains in many cases, as in miles-long, congesting popular lines while there's less traffic on routes that don't do enough business to turn a profit.

It also means fewer workers – about 45,000, or 29% of the industry's workforce, has been slashed the past six years and most moves happened before the pandemic, according to Greg Regan, a labor union president representing rail workers.

As he said during the hearing...

It is no mystery why the railroads can't provide flexibility or surge capacity right now. They eliminated those employees in pursuit of an operating ratio and higher profits and have now been caught with their hand in the cookie jar.

In the view of Brooks Bentz, a contributing editor at Logistics Management...

Wall Street eagerly latched on to this monolithic metric, which has incented rail carriers to continue pursuing the halcyon goal of cutting operating cost and improving margin, not for the benefit of their customers, but so Wall Street would speak kindly of them.

The largest problem the industry is facing isn't profitability now, but rather how it can build sustainable growth and profitability in the long term... something Wall Street cares nothing about, but ultimately the industry must.

In its first-quarter earnings call with Wall Street analysts last month, Union Pacific executive Kenny Rocker acknowledged the "impact deteriorated service levels are having on our customers."

He also said there have been some "difficult conversations" with customers being asked to ship less, like the complaint from North America's largest fertilizer producer that sparked our discussion. Yet another executive said that PSR was not the problem.

All in all, it sounded like Union Pacific leaders believe a worker shortage is the main issue. Rocker said the company has trained about 400 new employees this year so far and has 500 more in the pipeline, but it's still having trouble hiring...

With the prospect of a slowing economy... and continued persistent high inflation... that doesn't exactly scream that a "fix" to American railroad congestion is coming soon...

More reporting, please...

The STB announced this past Friday it will require certain railroads – all Class I companies, which include Union Pacific – to submit "service recovery plans"... regular progress reports on rail service, operations, and employment... and hold biweekly calls with STB staff.

The decision comes after the board's weekly performance data following the hearing indicated trends in "deteriorating service."

We're not sure if "more paperwork" is the answer, but this sounds like it could address at least some of the short-term bottlenecks on American railroads... either that, or more long hours for employees on trains tasked with the brunt of keeping everyone happy...

STB Chairman Martin Oberman, who ran the hearing two weeks ago, said on Friday that what he heard from farmers, shippers, government officials, and rail experts during the hearings highlighted "grave concerns" for the American economy. Oberman said...

While the railroads have faced certain challenges over the last few years, the evidence produced at last week's hearing is overwhelming that the railroads' longstanding practice of reducing operating ratios by cutting employment levels, mothballing locomotives, and eliminating other essential resources are the central reasons why farmers have been hours away from depopulating herds, manufacturing facilities have reduced operating hours, and shippers cannot get their products to market on time or receive essential raw materials for their companies.

These failures are harming the nation's economy and, in my view, are contributing to the inflationary forces affecting food and fuel in particular.

It sure seems that way. As we've written recently, we're turning from a "just in time" economy – when everyone expected and got what they wanted, whenever they wanted – to a "just anytime" economy, where people will pay a premium for what they really need.

For businesses, that could mean paying up for raw materials. For everyday people, that could mean hoarding baby formula, which is happening now due to a shortage – caused by a mix of supply-chain issues and a large recall – that is growing worse by the day.

A few thoughts come to mind...

Like investment... and proper prioritization...

As much as we'd like to get from Baltimore to New York City in 10 minutes by train, perhaps instead of focusing on "bullet train" passenger-service projects, which we hear so much about and read in headlines, railroads and other private companies could first try to make our existing systems function better – or at all.

For example... Bronaugh, from the USDA, said grain shipments by rail aren't even trackable in real time, making all kinds of things harder. She cited the railroads' legal obligation as common carriers to provide reliable service.

We live in Baltimore, a key place for early railroad development in this country... and we've seen the crumbling rail infrastructure and malinvestment with our own eyes. Like the time a few years ago, when a CSX freight train derailed and tumbled from atop an overpass, ironically and sadly damaging the Baltimore Streetcar Museum below...

Today, why should the essentials of life – like grain – be wasted or sit for longer than they need to because farmers don't have any trains to ship them on? Especially during a time when a large chunk of the world's grain supply is in jeopardy because of a war in Eastern Europe?

And during a time when prices for everything are still rising? These are rhetorical questions, of course. They shouldn't need to be asked, but we find ourselves thinking them and want to point them out because... talk about shooting ourselves in the foot.

New 52-week highs (as of 5/10/22): None.

In today's mailbag, feedback on yesterday's Digest about China's COVID-19 lockdowns... and yet more answers to our question last week about the Federal Reserve... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I really believe the lockdowns in China are more about showing its citizens who is in control. Shanghai, the most western of all China's cities, has been completely brought under Xi Jinping's control in the most brutal, nonviolent way, showing those citizens who is in control, the new Mao." – Paid-up subscriber Gary G.

"It appears to me, not an expert, that the nature of COVID, not as one disease but an evolving disease, with its variations still affecting supply, the Fed was hesitant to advance rates quicker. I see the attitude of your opinion as you all were not in the need of help and got checks anyway. I wondered too why I got one, and like you cashed it. It did seem to be a waste of money. There were and are people and businesses who desperately needed help. The help the Fed provided should have been income- or need-based." – Paid-up subscriber Robert D.

"I'm no expert, but I am old and have been around the block a few times. Rarely does the Fed do or 'doesn't' do anything major that does not have motivation and a targeted response behind it. I refuse to believe that they are entirely 'stupid'; they are of course acting stupidly sometimes or following direction (orders from the boss) from above that is dumb and very much ill advised...

"As one part of the reason they chose not to act, I believe the great post-pandemic realization was... people are not going back to work. How do we (leadership) get individuals making more money (gifted from the taxpayer) sitting at home as opposed to going to work, get up of the sofa and want to work, hold a job, contribute to society? The dumb answer: Make it impossible for them to consider that staying at home is the way to go. Make things so expensive for them that they can't stay home. Let inflation go for 'awhile,' drive them back to work, and then we'll rein it in! Dumb thinking, dumb leadership, which we know we are stuck with!

"Thanks for the opportunity to participate!" – Paid-up subscriber Philip L.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 11, 2022