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Weekly Update 3/11/2022: Markets React to Headline News

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Inflation and CPI

The Labor Department said that the February consumer price index (CPI) rose 7.9% from a year earlier, accelerating from the 7.5% annual rate seen in January. Excluding the volatile food and energy components, the “core” CPI rose 6.4% from a year ago. Both the headline and core figures were in-line with expectations. With the U.S. banning the import of Russian crude oil, the headline number is likely to rise even further in future periods. So far this month, the retail price of a regular-grade gallon of gasoline has risen 19.3% to $4.32 according to the American Automobile Association, better known as AAA. Food prices are also likely to see future spikes as the Ukraine and Russia combine to produce 25% of globally exported wheat. Higher feedstock prices will trickle into higher prices for beef, chicken and pork. This puts the Federal Reserve in a tight spot because if it does not aggressively fight the energy shocks it could lead to higher and more persistent inflation in the future. However, declining real wages leads to less disposable income and culling aggregate demand through rate hikes is also an unwanted outcome. All eyes now turn to next Wednesday when the Fed will reveal the results of their scheduled Federal Open Market Committee meeting.

When will inflation peak? No one knows for sure. March’s headline overall figures are likely to be larger than what we saw this week because it is going to capture the oil spikes that we referred to in the previous paragraph. The way that housing is calculated and incorporated into CPI means that that component, the largest in the index, is another reason why it will stay elevated if not increase. Beyond April, year-over-year inflation is likely to fall because of base effects. Remember 2020? When the first wave of the virus began to spread rapidly in March and April, lockdowns and other restrictions led to a collapse in demand and prices. By the time 2021 came around and an effective vaccine was being distributed, just the opposite was occurring—price levels were being compared to depressed year-earlier levels. Now, we are in 2022 and those supersized figures from last year have to be even super-duper supersized this year for the eye-popping headlines to continue. Of course, that does not alleviate the pain consumers feel at the pump and in the grocery aisles right now but suggests that secular hyper-inflation, the likes of which we have not seen since the 1970s, is still an unlikely event.

Labor Market

One key to an easing of the price pressure may come from the labor market. According to the Jobs Openings and Labor Turnover Survey, or JOLTS, released this week by the Labor Department, the number of available positions fell slightly to 11.3 million in January from 11.4 million in December. The “quits rate” which measures people who voluntarily walk away from their jobs was 2.8%. Those 4.3 million individuals comprised the smallest figure in the past three months. The survey results detail information from January and since then Covid cases have declined further and restrictions have loosened which suggests that even more folks on the sidelines will start to return to the job force. February’s nonfarm payroll figure of a gain of 678,000 jobs also provides incentive to those who are seeing inflation rise, attractive pay be advertised and an increased inability to go without a paycheck months after generous federal benefits came to an end. More people applying for jobs would be a good sign that though wages may be rising, the pace of that rise may be easing.