Uncertainty abound

It’s not going away

Bear with me, we’re going to talk about inflation again. The latest data on inflation came through this week in the form of the producer price index – basically this report tells us how much more (or less) producers are having to pay for their inputs, which gives us a good idea of how they’re going to change what they charge us for the goods they produce. This index increased 9.7% for January compared to the prior year, down slightly from the prior month but still way too high for comfort. Despite the rise in prices, regional manufacturing reports from New York and Philadelphia this week indicated growth across the manufacturing sectors.

Moral of the story: Consumers experience inflation at a lag compared to producers. What this report tells us is that producers are still facing near-record level increases on their input costs, which means we aren’t yet experiencing it as consumers. We’ve all noticed the higher costs for pretty much everything (including my most recent Netflix price hike, ugh) and there’s more coming.

We still love shopping

Retail sales increased 3.8% in January, well ahead of expectations for an increase of 2.1%, and significantly better than December’s report of a 2.5% decline. A big part of sales for the month was driven by online shopping and, weirdly, furniture sales. Just commiserated with a friend about how we’ve paid for furniture that’s been “on the way” for over four months. Anyway. The more surprising piece of this report was that sales at bars and restaurants only dipped 0.9% in January despite the massive wave of COVID cases.

Moral of the story: Even though consumers are feeling inflation, and are worried about inflation, they’re still spending, even during bouts of COVID. This makes me feel good about the consumer spending, which is the engine of our economy’s growth.

Fed speak

We got to see the meeting minutes from the Fed’s last meeting – and while the central bank’s officials see inflation as a real problem, it doesn’t seem like their reaction is going to be as aggressive as investors are currently expecting. The Fed’s current policy interest rate is near zero, and some investors are expecting they’re going to raise it to more than 1.50% by the end of the year, starting with a 0.50% increase in March. One of the most direct impacts of this on consumers so far has been the recent run-up in mortgage rates.

Moral of the story: Raising interest rates helps bring down inflation by effectively dampening demand. The issue is that a lot of our current inflation problem is driven by a lack of supply – higher interest rates aren’t going to fix that. The fear is this – if the Fed overreacts and raises rates too much (read: really stifles demand) without the supply bottlenecks clearing up, the pullback on demand could be too much and push us into a recession. Shocking nobody, the market has been super volatile trying to figure out what’s going to happen here. We’ve also added into this mess everything that’s happening with Russia and Ukraine, and that added uncertainty is weighing on stocks.

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