The US Consumer Price Inflation Index (CPI) rose 7% over the past year before seasonal adjustments, the steepest climb in prices since June 1982. Stripping out food and energy costs, which tend to be more volatile even in non-pandemic times, inflation rose to 5.5% between December 2020 and December 2021 — the biggest annual jump since February 1991.
Interestingly, excluding gas and used cars, December inflation was 3.7%. The prices of cars and trucks surged +37% in December, furniture prices hiked +17%, and 49% of small businesses surveyed in December said they will increase the prices of goods and or services sold in 2022.
One thing that is worrisome is the fact protein prices (meat, poultry, fish, and egg prices) have surged +18% since December 2019. Food inflation along with fuel inflation could cause the US consumer to pull back so we need to be paying close attention. But even though prices went through the roof last year, they are still nowhere near the historic highs from the 1980s. Inflation peaked in the spring of 1980 at +14.8%.
Remember, however, then-Fed Chair in the early 80s, Paul Volcker, made it his mission to squash inflation. Volcker raised interest rates to +19% in 1981, prompting a recession, however, in 1982. I’m not looking for any type of crazy rates like back in the early-80’s but if the Fed has to raise rates fast and far enough to stop inflation the economy could certainly feel some negative ripple effects.
I know the second major Covid variant Delta extended the inflationary shock waves and this recent resurgence from Omicron is causing even more supply-side complications. I know many bulls are saying that we are again at peak inflation and we will soon start to ease back but who would have ever thought we would be two years in and still peaking with new daily reported Covid cases at over +1.5 million. If new variants of Covid continue to come in waves who know when inflation peaks…
The government injecting billions of dollars into the economy and paying Americans to stay home via stimulus checks when Covid case numbers started to push past 10,000 daily, and now that we are exceeding one million new cases per day all the talk is about the Fed removing stimulus and the need for Americans to get back to some type of normalcy. Now here we are full-circle… In the famous words of the Grateful Dead, “What a long strange trip it’s been.”
The December Producers Price Index is out today and expected to show an annual inflation rate of +9.8% after hitting +9.6% in November, the fastest pace on record. Higher prices for energy, wholesale food, and transportation and warehousing have been the biggest contributors to the pickup in producer inflation.
Bulls believe that once the current Covid wave subsides, consumers will once again dedicate a higher percentage of their spending to services. That will in turn alleviate the crushing demand being placed on manufacturers and the transportation sector, ultimately helping to bring down prices for both raw materials and labor.
That’s the theory at least. It’s worth noting that that exact pattern was starting to develop late last year as the Delta-driven wave was subsiding and consumers were starting to feel more comfortable doing things like go to restaurants, travel, and visit the gym. As we know, that was totally derailed by the rise of the Omicron variant that is currently roiling nearly every aspect of the global supply chain.
Bulls are cautiously optimistic that the Omicron wave will be short-lived with most experts predicting it will peak by the end of January. The big question is what kind of damage will it do to already overly stressed supply chains in the interim? Inflation trends may also depend on how things shake out in the labor market. If workers remain in short supply and wages continue moving higher, it will likely limit how much inflation eases.
Today, investors will be listening closely to several Federal Reserve members that are scheduled to deliver comments, including Fed Governor Lael Brainard who will testify before the Senate Banking Committee as part of her nomination for Fed Vice Chair.
On the earnings front, the key highlights will be Delta Air Lines and Sanderson Farms.