Inflation Burns

The consumer price index (CPI) jumped 0.6% in January and surged 7.5% from a year ago. That is the fastest pace in four decades. Increases were broad-based with only a slight drop in prices at the gas pump, which was more than offset by an increase in other energy prices.

Food prices continued to skyrocket at the grocery store and at restaurants and bars, despite the chill of Omicron and a sharp drop in eating out at restaurants. Staffing shortages were acute in the face of Omicron, which amplified delivery costs. Meat prices fell but were still up at a double-digit pace from a year ago. Cereals and bakery products accelerated in price. The only thing that looks like a good deal is ice cream, one of my go-to’s for comfort food.

Core CPI (excluding food and energy) increased 0.6% and jumped 6% from a year ago; it is also tracking at a forty-year high. The surge in inflation is becoming more broad-based and entrenched. Inflation in the labor-intensive service sector is picking up as inflation in the goods sector remains elevated.

Vehicle prices continued to rise in January, with an increase in new truck prices offsetting a slight drop in new car prices. Vehicle producers have been trying to get dealers to stop charging above the sticker price of a vehicle but the backlog on demand remains strong. Chip shortages idled some plants again in January. Protests regarding vaccine mandates for truck drivers have stopped trucks from crossing the Canadian border. Much of the trade with Canada is between vehicle suppliers and producers.

Shelter costs accelerated during the month, posting the fastest annual gain since 1991. Low vacancies and the end of rent moratoriums are expected to continue to push rents higher in the year ahead. This is at the same time that owner’s equivalent rents, which is a measure of home ownership costs, is accelerating; those prices have already exceeded the pre-pandemic pace and are on track to cross the peak hit during the housing bubble in 2007. Those two components alone make up more than a third of the CPI.

Other service sector prices are accelerating. Everything that includes the cost of labor from laundry services to household operations - cleaning, snow removal, lawn care and repairs - is accelerating.

The only declines in prices due to the Omicron wave were in hotel rooms and rental car prices. Airfares continued to rise and thousands of flights were canceled due to staffing shortages and winter storms. The few declines in hotel room rates and rental car fees will quickly reverse. Resorts are all booking up in the search for a return to normalcy.

The Federal Reserve has concluded that variants are more inflationary than disinflationary over time, which is confirmed by today’s inflation data. They are now risking a more entrenched and persistent inflation in the service sector. Expect the Fed to raise rates by one-half percent at the next meeting in March. We are expecting it to raise rates by three-quarters of one percent by June. That will mark the fastest pivot on rate hikes since 1994, which nearly derailed the recovery.

Bottom Line
Inflation is hot; underlying inflation will remain hot, even as some supply chain disruptions are resolved later in the year. Today’s data coupled with the resilience of hiring through the Omicron wave in January means the Fed has to abruptly hit the brakes which increases the risk of a misstep.

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