As Inflation Sizzles, Fed Panics

The consumer price index (CPI) rose 0.5% in December, after rising 0.8% in November. Declines in prices at the gas pump and for natural gas accounted for much of the slowdown on a month-to-month basis. The CPI surged 7.0% from a year ago in December, a new pandemic peak and the hottest pace since June 1982.

Food prices moved up again in December and jumped 6.3% from a year ago, well ahead of most wage gains. Proteins - meats, poultry, fish and eggs - fell marginally during the months but were still up a staggering 12.6% from a year ago. Comfort food is also escalating in price. Candy was up 4.5% from a year ago, while snacks rose 5.60% from a year ago.

Core CPI, which excludes food and energy, rose 0.6% during the month and increased 5.5% from a year ago. That is also a pandemic high and the fastest pace since early 1991, which marked the onset of the Gulf War. Gains are becoming more broad-based and showing up in both goods and services.

Prices for bIg-ticket items like furniture and vehicles continued to post strong gains during the month and were up at a double-digit pace from a year ago. Used vehicle prices jumped 37.3% from a year ago in December and continued to accelerate after a setback in the wake of Hurricane Ida and widespread flooding late summer.

Discounts were scarce on traditional holiday gifts during the holidays. Prices on everything from apparel to toys picked up momentum during the month. Smart phones, which have become an appendage for many, were the only really good deal, with prices plummeting by 14.1% from a year ago.

Airfares snapped back after falling in November but are only up 1.4% from a year ago. Mass transit inside cities picked up and is now running 8.5% ahead of a year ago.

Shelter costs continued their upward march. Hotel room rates are now up 23.9% from the lows of the winter wave, when many canceled in-person celebrations a year ago. The more worrisome acceleration is in rents and home ownership costs; the latter is up at its fastest pace in nearly five years and could easily exceed the peak we hit during the housing bubble in 2006. Investors are snapping up properties unseen for cash and flipping them to rent, which is crowding out first-time buyers.

The surge and broadening of inflation has been a red flag for the Federal Reserve. They have pivoted from being patient to panicking on inflation in record time. Members of the Federal Open Market Committee - the policy setting arm of the Federal Reserve - now appear committed to a rate hike in March and reductions in the size of the Fed’s massive balance sheet soon after. Omicron and the disruptions it is causing globally are not likely to stop them.

The Fed and other central banks now view variants as inflationary than disinflationary given the havoc they reap on supply chains. The jury is still out on Omicron’s effects given the fact that emergency aid and fiscal stimulus have lapsed. Low-wage households, which lose paychecks due to Omicron, will have to drain their savings. So many businesses are disrupted that many businesses are being forced to temporarily shut down in response to the surge in infections.

Bottom Line
Inflation has soared as the recovery gained steam. Overall economic growth will easily come in at the fastest pace since 1984 for 2021; inflation is also back to 1980s levels with the Fed now poised to combat it. This is the first time the Fed has chased instead of trying to preempt a nonexistent inflation since the 1980s. Brace yourselves.

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