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As long as the data meets expectations, bad news isn’t quite as bad, right? At least this is the case with economic data, inflation in particular. The December year-over-year numbers for both consumer and producer inflation were in line with, if not better than, expectations from the financial markets. However, the reality is the numbers climbed once again to the highest levels in decades. CPI rose to 7.0 percent, with the core rate climbing to 5.5 percent. Year-over-year PPI was even worse. The headline rate increased to 9.7 percent, followed by the core level at 8.3 percent. The good news is that monthly price gains are moderating. Food, housing, and medical services had the slowest monthly increase since September. Energy prices rose the least since April. However, costs for apparel, used cars and shelter continue to rise, or at the very least, not fall. With wages not keeping pace with inflation, the longer it takes supply chain disruptions to dissipate, the more financial pressure is placed on the average household. Inflation is expected to cool after the supply shortages and disruptions are resolved, but the ongoing wave of COVID variants continues to present risks to prices in the short term. The Federal Reserve is convinced it will be able to bring inflation under control this year, with some economists predicting inflation will moderate to 3.0 percent by the end of 2022.
Key Indicators this Week
Retail Sales – U.S. retail sales fell 1.9 percent in December, the largest drop in 10 months. Core retail sales were worse, falling 2.3 percent. The numbers should not be much of a surprise, even though they were lower than the markets expected. We had already learned last month that holiday shopping slowed in December, not because we were shopping less but because we had done the heavy holiday shopping earlier in the season. Ten of the 13 major categories posted declines in sales. The most surprising was an 8.7 percent drop in non-store retailers, a proxy for internet sales. It is difficult to blame omicron for a drop in online shopping, which suggests that the slump in December was largely due to earlier shopping. The only categories with gains were building materials, health stores, and miscellaneous stores. The weakness at the end of the year, however, did not prevent 2021 from being a strong year. Overall sales increased 19.3 percent last year, a stellar rebound from a 0.6 percent rise in 2020.
Consumer Sentiment – Soaring inflation and the spread of omicron pushed consumer sentiment lower as 2022 began. The University of Michigan’s preliminary sentiment index fell to 68.8 from 70.6 in December, the second lowest in a decade. Survey respondents expect inflation to rise 4.9 percent over the next year and 3.1 percent over the next five to 10 years, both levels higher than in the previous survey. The measure of how people feel about current conditions fell to 73.2, the lowest since 2011, while a measure of future prospects declined to 65.9, a drop of more than two points. Thirty-three percent of respondents reported their financial situation is worse than a year ago, just slightly above the level one month into the pandemic. The outlook is starker among cash-strapped families. Twice as many households with incomes in the bottom third, versus the top third, reported worsening finances, the report said.
Sarina Freedland – Senior Investment Officer
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