Inflation Sizzles, Broad-based Increases

The Consumer Price Index (CPI) jumped 0.8% in November and surged 6.8% from a year ago. That marks the hottest pace of overall inflation since June 1982, when inflation was decelerating in response to aggressive (double-digit) rate hikes. Inflation peaked at 14.4% in May of 1980, more than double what we are seeing during this cycle. That is also more than double the peak we expect this cycle. We will likely decelerate as we get into spring but not enough to stop the Federal Reserve from hiking rates.

It is important to remember that the current inflation is very different from the stagflation of the 1970s. We have a booming economy with heat. Profit margins remain at a record high, which means companies are outpacing their wage costs. Watch for profit margins to come in as the Fed raises rates and inflation moderates.

Energy prices started to show signs of coming off the highs hit mid-month and could alleviate the upward pressure at the gas pump as we move into December. Still, energy prices alone posted the largest increase for the month with a rise of 3.5%. That compares to a 4.8% increase in October and is more than 33% higher from a year ago. Prices at the gas pump alone are up nearly 60% from a year ago. Heating bills this winter are going to be shockers.

Food prices rose 0.7% in November and 6.1% from a year ago. Gains in prices at the grocery store were only slightly less than gains at restaurants and bars. The cost of proteins - meats, poultry, fish and eggs - jumped 12.8% from a year ago and continued to drive overall inflation gains with the exception of eggs, which fell by nearly 3% during the month but remained 8.0% above a year ago. The only place the costs of food have fallen have been at work sites and schools. The Fed has the least sway over food and energy prices, which are the most important to most consumers.

The core CPI, which excludes food and energy, rose 0.5% during the month and jumped 4.9% from a year ago. That is the fastest pace since mid-1991.

Gains were broad-based with increases in every major category. Supply chain disruptions meant fewer Black Friday discounts by retailers. Shortages have hit everything from apparel to electronics, appliance and vehicle dealers. Apparel alone surged 1.3% during the month and was up 5% year-on-year. Men’s apparel rose at a more rapid clip than women’s apparel.

This is at the same time that airfares and hotel room rates picked up sharply with holiday travel. Airfares alone jumped 4.7% during the month but are still down 3.7% from a year ago when fewer planes were in the air. Lodging was up 3.2% for the month as hotel vacancies plummeted; they are now 25.5% above the lows we saw a year ago.

Shelter costs outside of hotel room rates accelerated at the fastest pace since the start of the pandemic. Rents in major cities have done a full U-turn and are once again surging, while the impact of skyrocketing home values is showing up in owners' equivalent rent.

Medical care continued to rise but at a slower pace in November than October. The Delta wave is once again filling hospitals to capacity in many states, which has prompted some hospitals to once again suspend elective surgeries. This takes a toll on hospitals and is costly but slows the pace of medical inflation in the near term.

Household operations, which include maids to lawn care, moving and repair services, were up 1.1% for the month and jumped 8.4% from a year ago. This is a place where wage-push inflation is the greatest, given the outsized role labor plays in setting costs.

Bottom Line
There are few if any places that inflation has not accelerated in recent months. That will have heightened the push within and outside of the Fed to remove accommodation and raise rates, even as inflation moderates a bit in 2022. It will not cool enough, fast enough to be insignificant to most consumers, which is the Fed’s ultimate goal.

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