- The US is leaving the supply crisis and high inflation behind, economist Susan Sterne told Insider.
- Data shows inventories rebounding and she predicted spending plummeting after the holiday season.
- People are already reining in demand, and it's likely companies will discount surpluses in 2022, she said.
Inflation is the worst it's been since the early 1980s. But an award-winning expert on consumer behavior thinks it won't stay that way for long, as supply roars back, demand evaporates, and the shipping crisis is patched up.
Prices climbed 6.8% in the year through November, according to Consumer Price Index data published Friday. That's the highest year-over-year inflation since 1982 and caps a months-long streak of historically strong price growth. With several pockets of the economy reaching a full recovery, inflation has emerged as the biggest thorn in the country's side.
Much of the latest inflation surge is linked to the supply-chain crisis ensnaring the global economy. Material shortages, port logjams, and order backlogs have kept businesses from matching strained supply with shoppers' extraordinary demand. The phenomenon has turned the holiday season into an inflationary nightmare.
But the worst of the mess is already behind the country, Susan Sterne, president and chief economist at Economic Analysis Associates, told Insider on Friday. With decades of work on the behavior of the American consumer to boast of, Sterne's expertise helped her accurately forecast much of the pandemic's fallout and the following recovery. By using a consumer-centric approach over one that prioritizes top-down data, Sterne has decoded the COVID economy better than many peers for years.
Her latest take: the cavernous gap between supply and demand is already closing.
The Thanksgiving and Black Friday shopping weekend "was weaker than expected, so you'll start to see some aggressive discounting," she said.
Both sides of the supply and demand conundrum powering higher prices should ease in the months ahead.
The first part of the equation has to do with rebounding supply. New orders at manufacturers slowed in November while inventories climbed higher, according to leading industry surveys, with some firms stockpiling goods to counter the supply-chain crisis. The share of manufacturers with higher inventories is the largest it's been since 2010, signaling supply is finally picking up, Sterne said.
At the same time, Americans' demand is on the decline. Sentiment readings from the last few months show Americans' recovery hopes cratering amid high inflation. Consumers can either decide to buy more now before prices rise further, or elect to slow their spending since prices have gotten too high, Sterne said. The latest indicators suggest the latter is coming true.
"They've had phenomenal consumption for two years, so it's not that we're coming from a period of very low spending ... we're beyond this great boom time that we've been through," Sterne said. "This is the first time in three years we haven't had consumers with all this extra money in their pockets and small businesses with their PPP loans."
How the US goes from shortages to surpluses
Plenty of data is showing that we're seeing the supply chain recover. Shipping costs, long-sitting containers, and import arrivals all show logjams easing through November. Third-quarter earnings reports also signal the supply crisis has already peaked, Jefferies economists said in a Friday note.
Cooling energy prices suggest the recovery will be even faster in the months ahead. Elevated energy costs have played a major role in driving transportation prices higher and tangling the global supply chain, Sterne said. Crude oil prices have fallen significantly since hitting seven-year highs in November. That should help companies shore up supply faster, Sterne added.
The shift from a supply shortage to a demand shortage could be so strong that Americans face discounts in 2022 instead of empty shelves. The fourth quarter is the busiest time of the year for consumer spending, but the following months usually see demand quickly fade, Sterne said, adding a sharper slowdown would pave the way for discounts to return.
"[Demand] just disappears into mid-January and February until we get to spring," she said. "It's a period of very, very slow demand, which makes people nervous, particularly if inventories are still on the road and arriving in their warehouse. That's what we should watch for."
The US' transition to cooler inflation and healthier supply was never "a question of if, but a matter of when," Stern added. As far as Sterne is concerned, that "when" is already here.