Baby Food Prices Just Revealed a Dark Truth About the U.S. Economy

Jeff Snider · Atlas Financial

Baby formula spike is a relative price shock from squeezed incomes, not generalized inflation.

The 5.1% October jump in baby food and formula prices is treated as a relative price shock, not sustained inflation. Snider argues that inflation needs broad pricing power and income or credit to validate repeated increases. Here incomes are not keeping pace, so a higher price for a necessity just means less spending elsewhere. Ingredient costs, energy-driven transport costs and a smaller birth cohort spreading fixed costs over fewer customers are cited as the drivers. A household facing roughly $400 of extra monthly bills has to cut other purchases, borrow more or drain savings, rather than gaining money to support a permanent inflation cycle.

“If incomes aren't keeping pace, a higher price for one necessity means less spending somewhere else. That is a relative price shock, not necessarily a generalized inflationary process.”at 3:34

Jeff Snider · Atlas Financial

US consumers are cutting back as necessities squeeze budgets; the energy shock is destroying demand.

Snider argues that rising costs for groceries, power, rent, insurance and childcare consume a larger share of household budgets, forcing families to cut spending elsewhere, such as vacations, restaurants and car replacements. Rising card balances, smaller down payments and longer loan terms are read as evidence of households struggling to keep consuming without the income to support it, not as strong demand. He says the energy shock works like a tax and that, absent any sign of offsetting income gains, overall demand has to weaken. He points to retail sales benchmark revisions showing people buying fewer items and postponing major purchases.

“But higher card balances, smaller down payments, and longer loan terms aren't evidence of strong demand. They're evidence that households are struggling to maintain consumption without the income to support it.”at 4:04

Jeff Snider · Atlas Financial

The energy price shock acts like a tax, shifting purchasing power from households to producers.

Snider frames the energy shock as a transfer rather than a source of broad inflation. Higher energy costs move purchasing power toward energy producers and away from households and energy-consuming businesses. Unless the economy generates enough additional income to offset that transfer, overall demand must weaken. He says there is zero sign of such income gains. Jet fuel costs rising for airlines and higher transport costs for formula producers are cited as examples of this transfer.

“It transfers purchasing power toward energy producers and away from households and energy consuming businesses.”at 4:27

Jeff Snider · Atlas Financial

Airlines are cutting growth and capacity under a cost shock and weakening customer demand.

Virgin Atlantic plans to fly about 8% less capacity this winter, citing both higher fuel prices and softer-than-expected demand. Virgin expects its jet fuel bill to rise by hundreds of millions of pounds next year, but soft demand limits its ability to pass those costs to customers through higher fares. Snider notes that IAG abandoned growth plans, Ryanair is planning a cost purge after a 15% decline in first-half after-tax profit, American Airlines cut its full-year outlook again, and United forecast weaker fourth-quarter earnings. He reads this as companies caught between a cost shock and weakening customers, not as an inflationary environment.

“So airlines are facing higher costs, but they aren't responding like companies operating in an inflationary environment. They're responding like companies caught between a cost shock and weakening customers.”at 7:11

Jeff Snider · Atlas Financial

Bond market prices policy-mistake risk and weaker demand, not sustained inflation.

After the hot CPI report, the two-year yield rose about 17 basis points while the ten-year rose only about nine or ten, flattening the curve by roughly seven basis points toward inversion. If markets believed the October price data marked the start of a sustained inflation outbreak, the concern would have spread across the curve, with longer yields and inflation compensation rising. Instead the move was concentrated at the short end, which is most sensitive to Fed expectations. Ten-year breakevens fell to about 2.20%, lowest since July, and the five-year, five-year forward inflation rate fell to near a multi-year low. This shows the market expects weaker future demand to stop the energy-driven cost increases from spreading.

“If the market believed the October price data represented the start of a sustained inflationary outbreak, the concern should have spread across the entire curve.”at 7:59

Jeff Snider · Atlas Financial

Fed rate hikes into a weakening economy risk another policy mistake that won't fix the shock.

Snider argues the short end of the Treasury curve moved on expectations that policymakers would respond to a concentrated energy-driven price shock by hiking rates again. He believes this would be a mistake, since the economy is already weakening and demand is being destroyed by the cost squeeze. He warns that central banks may end up tightening themselves anyway, which he sees as a further risk to growth. He sarcastically notes that the Fed's rate hikes may eventually help 'someone somewhere', contrasting this with the immediate hardship of families.

“It was pricing the risk that policymakers would respond to a concentrated shock by increasing rates yet again with an already weakening economy that they're just gonna completely ignore.”at 8:27

Jeff Snider · Atlas Financial

The US auto market has permanently shrunk as lower-income buyers are priced out.

The record average transaction price of $51,109 is misleading. Automakers have pushed high-margin pickups and SUVs and eliminated cheaper models, so compact cars now cost around $28,000 and full-size pickups near $68,000. Millions of households have been effectively priced out, so the average rises even as unit sales fall. About 60 million people now buy new vehicles each year, roughly one million fewer than before the pandemic, and buyers skew older and wealthier. October sales ran at about 15.5 million annualized, below expectations, and fleet purchases masked weaker retail demand. Average amounts financed of $44,664 and the rise of 84-month loans are read as stretching unaffordable prices, not as affordability. Mexican vehicle production and exports collapsing signal that manufacturers expect weaker US sales.

“A key industry has permanently shrunk and not by a little while they keep telling us this economy is resilient.”at 10:49

Jeff Snider · Atlas Financial

Midterm results show voters rejecting the 'resilient economy' narrative and punishing incumbents.

Snider argues voters have consistently said the economy is not resilient, and the midterm vote confirmed this. He calls it an 'eviction cycle' in which voters punish incumbents and establishment candidates who insisted economic conditions were better than households experienced. Official messaging that inflation has improved, labor markets are strong and consumers are resilient is seen as denying real deterioration in living standards, which turns economic frustration into political anger.

“Voters have been saying, consumers as voters have been saying this entire time, the economy is not resilient.”at 15:01

Jeff Snider · Atlas Financial

Wage-price spiral fears are weak; workers recovering lost purchasing power would not be inflationary.

Policymakers warn about a wage-price spiral whenever workers try to recover purchasing power through higher pay. Snider argues the historical evidence for that fear is weak, particularly when real wages have already fallen. Workers did not create the original energy or pandemic supply shock, and restoring their lost purchasing power would not be inflationary. He says that recovering purchasing power is the key ingredient to a legitimately booming economy, while suppressing wages only leaves households with less income to pay for formula, electricity, insurance and housing.

“Now the historical evidence for that kind of fear is weak to begin with, particularly when real wages have already fallen.”at 17:37