It’s getting worse
This was another week of markets reacting daily to issues surfacing because of the Ukraine/Russia conflict – notably, commodities prices (oil, nickel) went bananas this week. One of the more notable economic data points in the middle of all this was the February Consumer Price Index (CPI) reading that showed inflation accelerating in February to 7.9% on an annual basis, the highest since January 1982. Not surprisingly, gas, groceries, and housing were the main drivers of the elevated inflation print. Unfortunately, wages haven’t kept up, falling 2.6% over the past year when adjusted for inflation.
Moral of the story: This CPI report wasn’t really a surprise for investors following what’s been happening to prices. Increasingly, it feels more likely that we’re going to see a few things converge to create a more meaningful economic slowdown in the coming year – inflation that will persist because of the Russia/Ukraine crisis, wages that won’t keep up with inflation and result in lower consumption, and tightening policy from the Central Bank and Federal Government. Hopefully I’m proven wrong.
We’re not happy about it
Shocking zero people, consumer sentiment fell more than expected for March to 59.7, the lowest reading since 9/11 (yikes). This was driven by the rising gas prices. Even though we sourced very little of our oil from Russia (and now it’s banned altogether), the energy market is a global market and we’ve seen global supply decrease (by taking Russia out of the picture due to sanctions) so Econ 101 tells you that lower supply means rising price (more on that here).
Moral of the story: The underlying pieces of this survey showed that consumers had deteriorating expectations for current and future economic conditions as well as higher expectations for future inflation. Inflation can be a self-fulfilling prophecy where people buy things today to avoid paying higher prices tomorrow – which leads to higher prices today. Hopefully that’s not the cycle we fall into, but consumers are still spending, the job market is still really strong, so tbh it’s up in the air in terms of what lower sentient actually means for consumer spending and overall economic growth.
Government spending
This week Congress passed a $1.5 trillion funding bill that covers expenses through September. Among other things, the legislation includes $13.6b in humanitarian and military support for Ukraine. Interestingly, the bill didn’t include the $15.6b COVID relief funds that were included in the first draft.
Moral of the story: Part of the reason for inflation has been the excess amount of money being pumped into the economy that’s been creating additional demand – and additional “free money” being pumped directly into the pockets of consumers in the form of COVID relief would only worsen the situation. Democrats are trying to pass a separate COVID relief bill next week, we’ll see how it goes.