Have you heard, this thing called inflation
There were a couple big pieces of information that moved markets this week. The first was the January number for inflation, as measured by the Consumer Price Index. Inflation came in at a hot 7.5% overall, and 6% on a “core” basis, which excludes food and energy. This read on increasing prices was worse than expected and marks the sharpest annual increase in prices since February 1982.
Moral of the story: The market is expecting more and more aggressive action from the central bank to curtail the impact of inflation by raising interest rates. Higher interest rates = lower present values for future earnings = lower stock prices. Unsurprisingly, stocks reacted negatively to this inflation report in preparation for the upcoming policy changes to be announced at the next Federal Reserve meeting.
The other big market-moving piece of information surfaced on Friday afternoon when markets were almost ready to call it a day and take a break over the weekend. All eyes turned to the other side of the pond as the US and its allies responded to a warning that the Russian military could invade Ukraine at any moment. The US ordered most of its staff at the embassy to leave the country and has made it clear that if Russia does, in fact, invade Ukraine, there would be a united response from the US and its allies.
Moral of the story: Russia is the world’s second largest producer of oil. If this issue gets out of hand, we’re going to have some major disruptions in the energy markets from a supply perspective while demand comes roaring back post-Omicron for global and domestic travel. Gas prices have already been increasing at an insane clip, and this would further play into that dynamic. The higher uncertainty drove investors to decrease risk by selling stocks and buying US government bonds, causing stocks to take a tumble closing out the last trading day of the week.
We are…not confident
The preliminary read on consumer sentiment for February seems to indicate that sentiment is continuing its freefall, down 8.2 points from the prior month and down almost 20 points from a year ago. The souring sentiment has really been driven by the very real impacts of inflation the consumers are feeling every day – when they fill up their cars, buy groceries, and even pay rent. Combine this with the general feeling that the government isn’t doing anything to fix it (insert every Ron Swanson meme ever).
Moral of the story: Eventually the higher prices for things means that people are just going to have to buy less things. Since consumer spending makes up for the lion’s share of our economy, lower consumer spending means lower economic growth. As you can imagine, that is no bueno. All signs are pointed to one very important focus for policy-makers today: get inflation under control.