KEY DATA: CPI: +04%; Ex-Food and Energy: +0.1%; Energy: +4%/ Real Hourly Earnings: +0.4%; Over-Year: +3.7%
IN A NUTSHELL: “Inflation is moving up, but it is hard to see that it will become a problem anytime soon.”
WHAT IT MEANS: When an economy crashes and burns, as happened in the spring, prices have a tendency to crater. And they did. When growth rebounds, prices tend to firm and that appears as an increase in inflation. So, it should surprise no one that inflation has been picking back up lately. Prices jumped in December – well not really. The headline number was up pretty sharply but if you just exclude energy, consumer costs barely budged. The oil market has turned up sharply over the past two months, but that is likely to stabilize. The previous jump in vehicle prices is unwinding, and medical costs are no longer on the rise. One place where the pressure remains is food, both at supermarkets and in restaurants. Over-the-year both categories have increased by nearly four percent. Also, cookie costs are out of control. I have had to switch to cakes and cupcakes, where prices are down since December 2019.
The higher inflation and growth have pushed up mortgage rates. That is causing a surge in refinancings. The increase in rates is not likely to slow the housing market, though. The rates remain extremely low and changing job and housing locational decisions remain strong incentives to buy.
One number I like to watch is inflation-adjusted wages. But these days, the data are largely worthless. On the surface, it looks like wages are soaring. But alas, it’s the math, not the income. The hourly wage number is a weighted average and with large numbers of low paid jobs eliminated in December, the weighted average rose sharply. So, even adjusting for the large headline inflation increase, wages gains remained high. They are coming down on a year-over-year comparison and once restaurants start reopening, the gains should continue to decline. IMPLICATIONS:With eyes focused on Washington, it is hard to see how any single economic number could make a major difference. Inflation is just not something that drives the thinking of a lot of people these days, so I don’t expect the report to make a dent in the thinking about the markets. Instead, it’s the policy direction of the Biden administration that is being watched carefully. It is likely they will come out with the biggest stimulus bill they can. The Democrats argued that the last one was just a down payment and now they have the chance to do something big. The reality is the economy is not ready to try to stand on its own. There are too many zombie businesses that are being propped up by the stimulus welfare payments and taking those away now could lead to a major surge in bankruptcies. There will be a period of reckoning when the stimulus funds finally end, but there is little interest on the part of the incoming administration to face that day anytime soon. While there is little doubt that Republicans will rediscover their fiscal responsibility religion, the Democrats can simply answer by saying that they will pay for their programs the same way the Republicans paid for their tax cuts and spending on businesses loans. You notice I didn’t say how, which makes sense since no one in Washington pays for anything. Well, someone might pay, but that has nothing to do with the budget. And even that is not clear. Regardless, if there is one thing we have learned over the past decade it is that when the government and the Fed spend like crazy, the biggest winners are the markets. There is little reason to think that would be different if another major stimulus package passes.