Neil Irwin reminded us yesterday morning that a lot of hopes are riding on inflation easing this year. But it hasn’t happened yet—or over the last year.
Consumer prices surged more than expected over the past 12 months, suggesting a bleak outlook for inflation and increasing the likelihood of more than a few interest rate hikes this year.
The CPI (all urban index) rose 7.5% in January over a year ago, the Labor Department reported yesterday—the highest since February 1982. Economists were expecting an increase of 7.2%.
The so-called core CPI, which excludes volatile food and energy prices, increased 6%, compared with the estimate of 5.9%—its highest since August 1982.
By Dave Allen for Discount Gold & Silver
Neil Irwin reminded us yesterday morning that a lot of hopes are riding on inflation easing this year. But it hasn’t happened yet—or over the last year.
Consumer prices surged more than expected over the past 12 months, suggesting a bleak outlook for inflation and increasing the likelihood of more than a few interest rate hikes this year.
The CPI (all urban index) rose 7.5% in January over a year ago, the Labor Department reported yesterday—the highest since February 1982. Economists were expecting an increase of 7.2%.
The so-called core CPI, which excludes volatile food and energy prices, increased 6%, compared with the estimate of 5.9%—its highest since August 1982.
The month-over-month CPI also came in hotter than expected, with both headline and core CPI both rising 0.6% in January, compared with the estimates for a 0.4% increase by both measures.
U.S. stock markets declined at Thursday’s opening following the report, with rate-sensitive tech stocks hit especially hard.
Government bond yields rose sharply, with the benchmark 10-year Treasury note breaking through 2%—its highest since August 2019.
Markets also got more aggressive in pricing rate hikes ahead. Investors now believe the chance of a half a percentage point Fed funds rate increase in March is 44.3% after the CPI release—compared with 25% just before.
In fact, the chances of a sixth quarter-percentage point hike this year rose to about 63%, compared with about 53% before the release.
That would take the Fed’s benchmark to an upper-range rate of 1.75% from its current 0.25% (assuming 6 quarter-percent increases).
Economy at a Crossroads
Irwin observes that the inflation numbers come at a crossroads for the economy, with 2021′s rapid growth expected to moderate this year as fiscal and monetary stimulus fades.
Growth is still expected to be above trend, although sharper rate increases from an inflation-fighting Fed could prove troublesome.
In either case, higher inflation levels is likely to spell doom for Joe Biden’s Build Back Better plan in anything like its current form and size.
On a percentage basis, fuel oil rose the most in January, surging 9.5% as part of a 46.5% annual increase. Energy costs overall were up 0.9% for the month and 27% on the year.
Vehicle costs were flat for new models and up 1.5% for used cars and trucks in January. The two categories have posted respective increases of 12% and 40% over the past year.
Shelter costs were up 4.4% over the past year, while food costs jumped up an average 7% over the past year—although my daughter asks if you’ve seen a gallon of whole milk lately?
The good news is that this higher inflation is coming alongside a pretty robust albeit inconsistent jobs and wage rebound.
But inflation-adjusted hourly earnings rose just 0.1% for the month, as the 0.7% monthly gain in wages was almost completely overshadowed by the 0.6% inflation gain.
Are Prices Moderating?
However, listen to this, ladies and gentlemen: prices overall actually seem to be moderating if not gradually falling.
The monthly rise in CPI in October was 0.9%; in November it was 0.7% and in December and January it was 0.6%.
To compare, in the same months before the start of the pandemic in March 2020, the monthly increases were 0.1%, 0.3%, 0.2% and 0.1%, respectively.
But price moderation isn’t so significant when you’re paying nearly $4.00 a gallon at the gas pump or over $5.00 for a gallon of whole milk, but it’s something to keep our eyes on in the coming months.
Rates Were Going Up Anyway
Bloomberg’s Joe Wiesenthal wrote yesterday morning that regardless of January’s CPI number, the Fed was almost certainly going to start hiking rates in March anyway.
He noted the "mask off" moment earlier this month at the Bank of England, where its top Governor Andrew Bailey said that workers ought to show restraint in asking for higher wages.
Wiesenthal said the comment was “pretty surprising,” and I believe the criticism it drew was appropriate because of how bad it sounds to say that the answer to higher wages is for workers to ask for less. Really, Gov?
However, ya gotta admit that Bailey was simply expressing typical central bank logic that fighting inflation has to go through the labor market.
In response to Bailey, the Financial Times’ Martin Sandbu asked an interesting question:
"Why does the governor of the Bank of England encourage restraint in wage demands but not call for restraint in businesses’ attempts to protect their profit margins?"
I agree with Wiesenthal that this is not only a sensible question, but a necessary one to boot.
Put the Profits on Hold
Corporate earnings and profits are massing again right now. Stock buybacks are expected to soar this year after taking a year off.
Wiesenthal surmises, “As long as you're resorting to public persuasion as a means of fighting inflation, why not just ask businesses to hold off on the price hikes?” Indeed.
Wiesenthal’s colleague Tracy Alloway pointed out that one theme of this earnings season is that “companies that can raise prices are getting rewarded by investors” with higher share values.
Companies that “are only raising prices slowly to rebuild profit margins,” are getting punished with lower share values.
The thing is, shareholders like profit. And if you can raise your prices and contain costs without losing market share or shedding customers, more profits will result.
Still, as Wiesenthal suggests, “If we're talking about the ‘wage-price spiral’ as a real risk, it seems reasonable that we talk about the ‘profits-price spiral’ as well.”
Inflation heats up, shareholders demand that the margin gets rebuilt, prices pick up and so on and so on.
Or forego the profits for the next quarter or two and in the meantime reward the workers you’re going to need to make those profits grow in the long run.
It’s a new era of capitalism. Enjoy the rollercoaster ride and make sure you protect yourself from all the coming volatility by having a good chunk of your savings in gold and silver.