As the holiday season approaches, the inflation frenzy continues. Investors remain wary of factors affecting economic growth. Currently, the United States faces a cavalcade of supply chain disruptions, job growth, COVID-19 spread, and vaccine distribution.
Inflation Frenzy Continues
As anticipated, the October 2021 GDP report reflected the negative impact of the pandemic and supply chain issues on growth. As such, the latest inflation data matched expectations. A tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions caused inflation to increase in recent months to the highest levels since 1991.
This continued increase in inflation came even as personal income for average households declined. Now, investors and the Fed must decide how to handle inflation gains with the slowdown of growth thanks to the supply chain and COVID issues.
In general, wages and salaries grew 4.6% this month. Treasury Secretary Janet Yellen said she still expects inflation to dissipate though she acknowledged that it has been more persistent than expected.
“Year-over-year inflation remains high and will for some time simply because of what’s already happened in the first months of the year,” Yellen said. “But monthly rates I believe will come down in the second half of the year. I think we’ll see a return to levels close to 2%.”
CPI Rises as Inflation Frenzy Continues
As the inflation frenzy continues, the Consumer Price Index (CPI) followed suit. CPI looks at price changes for a broad range of goods and services.
In September 2021, Core CPI, which excludes the volatile food and energy components, rose 4.0% higher than a year ago. In doing so, Core CPI achieved the same annual rate of increase as last month. However, Core CPI hovers well above levels below 2.0% seen earlier in the year.
Fed officials and economists are divided about the recent spike in the annual inflation rate. Some believe the inflation spike stems from temporary factors caused by the pandemic. Meanwhile, others feel it will last for a long time.
PCE Price Index Rose Higher as Inflation Frenzy Continues
In August 2021, core Personal Consumption Expenditures (PCE) rose 3.6% higher than a year ago as the inflation frenzy continues. This matched the consensus forecast. Similar to CPI, this matched last month’s annual rate of increase.
However PCE also climbed up from just 1.5% in February, hitting its highest annual rate since 1991. While economists have been expecting readings of this magnitude during the reopening of the economy, they once again debate the long-term inflation outlook.
Inflation Frenzy Continues While Supply Chain Troubles Slow Economic Growth
With the spread of COVID-19 and major supply chain disruptions, it came as no surprise to investors that economic growth slowed last quarter while the inflation frenzy continues.
Third-quarter gross domestic product (GDP) represents the broadest measure of economic activity. The most recent third-quarter GDP showed annualized growth of just 2.0%. Thus, third-quarter GDP failed to meet the consensus forecast of 2.7%. Additionally, third-quarter GDP dropped down from 6.7% during the second quarter.
Overall, the impact of the report was small. Investors believe that the consumer appetite for goods and services remains very strong. Also, investors anticipate growth will accelerate as production issues resolve. Furthermore, companies need to catch up to demand.
ISM Index Rises Above Forecast
The Institute of Supply Management (ISM) released its newest national service index. The ISM national service sector index rose to 61.9. This exceeded the consensus forecast of 60.0. Moreover, the ISM national service sector index neared a record high. Levels above just 50 indicate that the sector is expanding. Analysts rarely see readings above 60, so he most recent report shows a continual pattern of economic expansion.
Of note, a large number of companies reported difficulties in hiring. Companies struggled to hire skilled workers while demand grows. Concurrently, supply chain disruptions also held back production. The coming months may funnel strong readings as companies attempt to catch up.
New Home Sales Jump; Home Values Continue to Rise
Sales of new homes jumped 14% from August 2021 to an annual rate of 800,000 units. New home sales surged above the consensus forecast of 760,000. Simultaneously, new home sales reached their highest level since March 2021.
The median new home price of $408,800 increased 19% higher than a year ago as the inflation frenzy continues. Generally speaking, home supply dictates the pace of both new and previously owned sales. Builders point to shortages of key materials and skilled labor as obstacles to faster construction.
Sales of existing homes in September rose 7% from August. Having said that, existing home sales remained a little lower than a year ago. Inventory levels declined 13% from a year ago. At just a 2.4-month supply nationally, housing inventory levels stay well below the six-month supply. Analysts consider a six-month to be a healthy balance between buyers and sellers.
Also notable, the mix of homes currently selling changed. Sales of homes priced between $100,000 and $250,000 fell 23% lower from a year ago. Rising prices and competition from investors made it more difficult for buyers to find affordable homes. Real estate analysts especially noticed this trend at the lower end of the market.
In contrast, sales of homes priced above $1,000,000 jumped 30% during that period. One consequence is that first-time buyers made up just 28% of sales in September, the lowest level since July 2015.
Home Shortage Still Impacting Market
With the shortage of available homes in many areas, investors have been closely watching the monthly reports on housing starts, and the most recent data contained mixed news. In September, overall housing starts unexpectedly declined from August, but still were 7% higher than a year ago.
However, the weakness was seen in multi-family units, while single-family starts were roughly flat from August. Rising prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction
Unemployment Falls; Insurance Claims Fall to Lowest Level in Months
The Department of Labor releases the total number of new claims for unemployment insurance each week, and the latest reading was 290,000, the lowest level since March 2020 near the start of the pandemic. This was down significantly from the inflated figures in the millions seen last spring during the partial shutdown of the economy, and just a little above the readings around 250,000 which were typical during 2019.
COVID Still Affecting Job Creation
The closely watched Employment report suggested that the spread of Covid continued to hinder job creation. Against a consensus forecast of 500,000, the economy added just 194,000 jobs in September, similar to August, but down from gains of over one million in July.
However, there were many offsetting factors, such as upward revisions which added 169,000 jobs to the results for prior months. The unemployment rate declined from 5.2% to 4.8%, far below the consensus forecast of 5.1%, and to the lowest level since February 2020.
These two components often paint a somewhat different picture because the figures for job gains are calculated from data reported by companies, while the unemployment rate is based on a separate survey of individuals. Average hourly earnings, an indicator of wage growth, rose 0.6% from July, well above the consensus of 0.4%. They were an impressive 4.6% higher than a year ago, up from an annual rate of increase of 4.0% last month.
Education Jobs Underperform
In addition, education jobs sharply underperformed expectations, but this likely was due to distortions in the seasonal adjustment caused by the pandemic. The data is adjusted to reflect historical seasonal trends such as the start of the school year, and many of the usual hiring and firing patterns have changed during the pandemic. To summarize, job gains fell short partly due to seasonal issues related to the pandemic, while wage gains were very strong, and the report had little net effect on mortgage rates.
Consumer Spending Rises Despite End of Unemployment Benefits
Economists had anticipated that the end of supplemental unemployment benefits for many people and a lack of inventory for some products would lead to a drop in consumer spending in September. Instead, retail sales jumped 0.7% from August, far above the consensus forecast for a decline of 0.2%, and were an impressive 14% higher than a year ago at this time.
Inflation’s Impact on Consumer Spending
As the holiday season approaches, experts are discussing how the rising prices due to the continuing inflation frenzy , and how it will affect consumer spending during a time of year that so many businesses rely on. Have the prices finally risen high enough to slow spending?
Yahoo! Finance experts Akiko Fujita and Zack Guzman polled Americans and found that 44% of Americans have not yet cut back on any form of spending due to inflation and rising prices (though 24% noted cutting back on dining out, 20% travel, and 11% events and experiences).
Fujita emphasized that the “yet” could still spell trouble for future spending.
“I wonder if those price pressures have gotten big enough for people to [cut back] yet?” Fujita asked. “Certainly, people are going to feel it a lot during the holiday season. I’ve seen it in the grocery store. I’ve seen those prices go up. But dining out, events, experiences, I wonder how many people have actually resumed events and experiences during the pandemic?
“It’s going to be interesting to see, especially during the holiday season, how this is going to affect some of those retailers. Because I think that’s when people are really going to start to feel the pinch.”
Fed Meeting Details Tapering of Bond Purchase Program
The Fed meeting’s September 22nd minutes provided greater detail about the anticipated plans for tapering their massive bond purchase program despite the continuing inflation frenzy. Notably, the Fed initiated its purchase program near the start of the pandemic. This was done to help the economy recover.
The Fed currently buys $120 billion per month of Treasuries and mortgage-backed securities (MBS). According to the minutes, the Fed plans to reduce it by by $15 billion per month. Beginning in November or December, the tapering concludes during the middle of 2022. This closely matched investor expectations.
Fed Debates “Deflation” While Inflation Frenzy Continues
Although the inflation frenzy continues into late 2021, Economist Nancy Lazar believes inflation will temper soon as demand for products from the pandemic slows down. Lazar cites “deflation” as a word to watch for the coming year. Overall, inflation already lasted longer than the Fed predicted due to unforeseen circumstances of opening up the economy after a pandemic.
“As the reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and longer lasting than anticipated, posing upside risks to inflation,” said Jerome Powell, Chair of the Federal Reserve. Before they consider further action, policymakers said inflation needs to ease up at the end of 2021. Powell said that policymakers are “directly monitoring the prices of particular goods and services most affected by the pandemic and the reopening, and are beginning to see a moderation in come cases.”
In this case, Powell referred to the used car market, which saw huge spikes in demand and prices during the pandemic but has since cooled off, as an example of what we might expect in the future with inflation.
Investors continue to monitor inflation and job gains as the economy reopening continues despite tight COVID regulations and supply chain bottlenecks that could negatively affect spending and growth in the coming months.
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