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It is difficult to believe that inflation is so high, it is pre-pandemic norm. Under the headline figures are signs of the fight against steep price rises being lost, which raises fears that elevated inflation may become embedded into parts of the economy where it is hard to eradicate.
The government reported Friday that its preferred inflation metric, personal consumption expenditures (PCE), rose 6.2% from a year ago in August. The reading was lower than in July.
The core inflation has increased by 6.4% over the course of the year through December 2022, but it is moderating, says Mark Zandi of Moody’s. Supercore inflation has only gone up by 0.9% in December, and has been up just 2.4% for the three months.
The Fed knows it’s in a tough situation. Inflation pressures are partly fueled by wage gains for workers. In an environment of a low unemployment rate and rising prices of goods and services, employees have been able to get big raises in pay to keep up.
Investors, economists and members of the Federal Reserve will be poring over the September jobs report on Friday morning for clues about the health of the economy. But one figure may matter more than most…and it’s not the number of jobs added or the unemployment rate. It’s wage growth.
The price of oil, other commodities and production costs are only a small part of inflation. The inflation picture is influenced by how much workers take home.
When people have more money in their wallets (virtual or good old-fashioned leather ones), they tend to be more willing to spend it. Companies have more flexibility to raise prices.
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“Wage growth has been on a slowing trajectory, and we suspect that softer wage growth will be a trend in 2023 as jobs available contract,” said Tony Welch, chief investment officer at SignatureFD, a wealth management firm, in a report.
The last major inflation gauge released in 2022, the November PCE report, showed an economy in transition. The Fed has raised interest rates many times in an effort to rein in the highest inflation since the 1980s.
Despite inflation pressures, retail sales have held up well. American shoppers will reach their breaking point eventually and begin buying essentials. Slower economic growth leads to lower prices, but also slower consumption.
The third quarter is over. It’s been another doozy for the market. It was not so nice in September. It was the worst month for the Dow since the start of the pandemic in March 2020.
But even though we’re seemingly in a bear market for everything as bonds, gold and bitcoin have all tumbled this year as well, there are some hopeful signs for the next few months.
The fourth quarter is typically a festive time on Wall Street. During the holidays, investors buy stocks in anticipation of robust consumer shopping. Businesses typically spend more as well to flush out those yearly budgets. In October, major companies often announce rosy guidance for the coming year.
Hirsch added that a dozen bear markets since World War II have ended in the month of October. And of those twelve, seven market bottoms happened during midterm election years.
Traders will definitely be keeping close tabs on Washington this fall to see if Republicans gain control of the House. That could lead to more gridlock in DC, which investors tend to like.
Whether or not Corporate America will be as bullish this October is up for debate given the concerns about interest rates and the global economy. After all, October is also famous for huge crashes, most recently in 2008 but also in 1987 and, of course, 1929.
Christopher Wolfe said that First Republic Private Wealth Management is close to a bottom. “A lot of quality companies are on sale. It is a good time to be patient.
China official factory rate; US employment cost index; consumer confidence; earnings from Exxon Mobil and others.
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Prices increased 6.6 percent after stripping out fuel and food — which tend to be volatile and are often removed from inflation readings to allow for a better sense of underlying trends — an uptick in the so-called core index that was also more than economists expected.
Still, Fed officials and Wall Street analysts will be more closely watching the monthly figures, including what happened between August and September. The monthly data gives a better picture of how prices are changing in real time as the annual numbers reflect what happened over the course of a year.
This month’s inflation expectations came in at 4.1%. That’s an increase from 3.9% in January and down from December’s 4.4%. The report shows that long-run expectations for inflation were not changed for the third consecutive month.
On average, Fed policymakers said in December they expect their benchmark interest rate to climb to 5.1% — from 4.625% now — and remain there at least through the end of the year.
In its seven meetings starting in March, the central bank’s policymaking arm raised its benchmark interest rate by a cumulative 4.25 percentage points. Mortgage rates in real estate were more than double the rate seen last year at this time as a result of the sharp hike in rates, according to Freddie Mac data.
Yellen’s optimism comes amid growing concern from economists and finance officials that a recession is likely at some point in the next year, but was based in part on elements of the latest data that showed signs a necessary slowdown in key areas of the economy leaves open a pathway to a “soft landing” as the Federal Reserve prepares to continue its rapid pace of rate increases.
According to the President, the economy remains strong, which is in comparison to how other economies around the world are doing.
The Bureau of Economic Analysis says that gross domestic product increased by an annualized rate of 2.5% in the third quarter. In the first and second quarters of the year, it was negative 0.6% and 1.6%, respectively.
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But Yellen’s view also underscored the complex balancing act President Joe Biden and his top economic officials have attempted over the course of this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices.
It is a reality that has hurt efforts by the administration to take advantage of what they view as a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.
Yellen also acknowledged frustration inside the administration that the efforts to pull the US economy out of crisis haven’t received the credit officials believe is merited.
There were a lot of troubles that American families could have faced. “These are problems we don’t have, because of what the Biden administration has done. So, often one doesn’t get credit for problems that don’t exist.”
Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.
It is an essential piece of an economic strategy designed to address many of the vulnerabilities and failures laid out in Covid-19, with significant federal investments in infrastructure and shoring up, or creating from scratch, key pieces of critical supply chains.
Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.
Repairs of damaged bridges are coming online in most places, but not every community. Many bridges will be repaired and roads will be improved in many communities. Money going into research and development is an important source for long term strength to the American economy. She said that America’s strength is going to increase and become a more competitive economy.
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The battle lines for raising the debt ceiling have been drawn this week and House Republicans will once again use their leverage to get the majority if they take the majority.
“The President and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Yellen said.
She made it clear she wouldn’t be a part of the time period when top officials usually leave an administration. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”
“I feel very excited by the program that we talked about,” Yellen said. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. And I want to be part of that.”
Household furnishings and operations and shelter are just a few of the items that have high prices due to price pressures.
Gas prices are back to last year’s levels, after spiking to a record high of just over $5 a gallon this summer. For perspective, a gallon of regular has fallen by almost 50 cents in just a month, making it about $10 cheaper to fill up an average SUV today than a month ago.
Shoppers scored major deals over the Thanksgiving shopping period. Online inflation fell 1.9% in November, the largest year-over-year drop in 31 months, according to Adobe Analytics.
Retailers awash with excess inventory are expected to keep marking down goods into the end of the year, as consumers shift from buying couches and clothes to spending on travel and experiences — where prices are not coming down for now.
Global supply chains work themselves out and commodity and shipping costs are falling in other areas. Rent and automobile costs are rising, but at a slower rate. After hitting a record high this summer, chicken prices have dropped sharply. And according to real estate site RealPage, apartment rents have fallen for three consecutive months.
The hike in the Fed’s benchmark rate is the smallest since last March, and signals that policymakers are shifting to a more cautious approach, after spending much of last year playing catch-up and boosting borrowing costs at the fastest pace in decades.
“I think it is good to see progress, but we have a long way to go to get back to price stability,” said Powell after the board announced its latest rate increase.
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Many Americans, already contending with price increases in nearly every part of their lives, are feeling the effects as they pay more in interest on credit cards, mortgages and car loans. The average rate of interest on used cars is 9.11%, compared to 8.12% last year, and they are making the biggest monthly payments on record.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the central bank said in a statement on Wednesday.
The stock market fell after the announcement of another increase, mostly as Wall Street digested the Fed’s warning that there are more rate hikes to come. But stocks recovered and the major indices were mostly flat by mid-afternoon.
Rents continue to climb, but Fed officials believe the worst of shelter inflation may be behind us. The increases in market rents have slowed.
The price of haircuts rose 6.8% in the last twelve months, while the price of dry cleaning jumped 7.9%. Services other than housing and energy account for nearly a quarter of all consumer spending.
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goods prices will come down, Powell said. We know what will happen with housing services. But the big story will really be the the rest of it, and there’s not much progress there. And that’s going to take some time.”
Powell has said that the job market is “out of balance” with more job openings than workers to fill them. The share of adults who are working and looking for work has not fully recovered despite the fact that the US economy has now replaced all of the jobs that were lost during the Pandemic.
Many older workers who retired in the last two years may not return to the job market. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.
Higher borrowing costs make it more expensive to get a car loan, buy a house, or carry a balance on a credit card. That’s already curbing demand in some of the more sensitive parts of the economy, like the housing market.
Inflation is not taking a holiday this year. The stories of rising prices were a major story of 2022, as it is today. Gifts are always a part of this season of gift-giving.
The price of a pear tree, a partridge, and all the other items mentioned in the 12 days of Christmas song have increased by 10.5%, according to the annual “Christmas Price index” compiled by PNC Bank.
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“True love is really going to have to shell it out this year,” said Amanda Agati, chief investment officer at PNC. “Clearly, our specialty gift basket of goods and services is not well insulated from some of the trends that the broader economy is experiencing.”
Agati said that Turtle doves and French hens had both seen double-digit price increases. The increasing cost of bird feed as well as the growing popularity of backyard farming has been blamed.
The official inflation indicator compiled by the Labor Department, the Consumer Price index, was 7.1% in November.
The measures are both higher because of costly services. In the case of the Christmas Price Index, that includes dancing ladies, piping pipers, and especially leaping lords. The lords’ price-tag — which is based on salaries at the Philadelphia Ballet — leapt 24% this year.
“There’s no question services inflation is higher than goods inflation in the PNC Christmas Index,” Agati said. What we are seeing in the economy as a whole.
The Fed is also keeping a close eye on the price of services, such as haircuts and restaurant meals. Those prices are mostly driven by labor costs, and therefore less likely to come down than goods prices.
The Fed tries to control inflation and the interest rates are going up. So people who put their holiday purchases on a credit cards may end up paying even more.
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The price of seven swans a swimming was unchanged in 2022. Swan prices have been stagnant for the last three years, which may be a sign of waning consumer demand.
The annual increases for both PCE inflation indexes hit their lowest levels since October 2021 and follows continued declines in other inflation gauges, such as the Consumer Price Index and Producer Price Index.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending was up 0.1% in November as compared to 0.8% the month before. Personal income increased in November but was unchanged from the month before.
Higher interest rates have begun to have the desired effect. Consumer spending has slowed in recent months. Although prices are still rising faster than the central bank would like, inflation has dropped significantly.
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. Faucher noted that the services index posted a monthly increase of 0.4% and a year-over-year increase of more than 9%, unchanged from October.
“The Federal Open Market Committee will continue to increase the fed funds rate in early 2023 until it becomes more apparent that the job market is cooling, and wage growth and services inflation are slowing to more sustainable paces,” he added.
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A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.
New orders for transportation equipment drove the decline according to the report. Excluding transportation, new orders go up.
“Core durable goods orders slowed but did not contract, reflecting growing unease about the economy,” Diane Swonk, chief economist for KPMG, tweeted Friday after the report’s release. The preliminary reading for December suggests manufacturing activity will contract further by the end of the year. A cold winter expected for the manufacturing sector.
The final December reading for the index of consumer sentiment came in at 59.7 in December, up slightly from a preliminary measurement of 59.1 and November’s final reading of 56.8, according to data from the university’s Surveys of Consumers.
Consumers are feeling more positive about the future of the economy, even in February, according to a survey by the University of Michigan.
Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.
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The S&P 500 lost roughly 20% of its value, and theNasdaq fell by more than 30% during the period. All three major US markets suffered their worst years — by far — since 2008.
Hiring remains surprisingly resilient. The unemployment rate has fallen dramatically from nearly 15% in the spring of 2020 to 4.3% in November, when the economy added 263,000 jobs.
The number of first-time applications for unemployment benefits was up last week. That’s still low historically and almost exactly where jobless claims were a year ago, long before recession fears emerged.
“This is one reason to the be optimistic the economy could skirt a recession,” Moody’s Analytics chief economist Mark Zandi told CNN on Thursday. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”
But that trend has begun to reverse, at least when measured on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.
If the Fed hasn’t already done that, it’ll be a problem if they eventually raise rates so high that they cause a recession.
The Fed is in danger of making the same mistake as before, by pushing interest rates higher and the economy slowing to bring prices under control.
The Fed’s actions beyond this week’s meeting will depend primarily on whether inflation is truly slowing. Investors will get another clue when the January jobs report is released on Friday.
The market will also be closely watching reports about private-sector job growth from payroll processor ADP and the Job Openings and Labor Turnover Survey (JOLTS) from the Department of Labor this week. There were more jobs available than expected in November.
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Workers will be unwilling to relinquish the bargaining power they have gained over the course of the past year, according to a report.
And even though the pace of jobs gains may be slowing, it’s not as if economists are starting to predict monthly job losses like the US has had in previous recessions.
“Combine a strong labor market with a still substantial reserve of excess savings, and you have all the components in place to keep the Fed up at night,” Vaillancourt said.
“This is what the path for a soft landing looks like,” says Aaron Sojourner, an economist at the Upjohn Institute for Employment Research. Inflation has come down but there’s not a recession.
Wall Street clearly believes in the notion that a soft landing is possible. It has been a great year for tech stocks despite a lot of layoffs from top Silicon Valley companies.
Some argue that more tech layoffs won’t be a problem. Investors seem to be (somewhat perversely) taking the view that companies cutting costs is a good thing for profits and that revenue likely won’t be impacted in a negative way because consumers are still spending.
“A theme that can’t go unnoticed this month is how traders are rewarding firms for cutting jobs. The consumer may be strained with corporate layoffs happening every evening. Maybe not as much. It turns out that demand is decent,” said Frank Newman, portfolio manager at Ally Invest, in a report.
But a continuation of the Nasdaq’s surge may depend a lot on how well a quartet of tech leaders do when they report fourth quarter earnings next week: Facebook and Instagram owner Meta Platforms, Apple
(AAPL), Google owner Alphabet (GOOGL) and Amazon (AMZN).
“A set of much weaker-than-expected reports from these firms could dent the market’s strong start to 2023,” said Daniel Berkowitz, senior investment officer for investment manager Prudent Management Associates, in a report.
(TSLA) reported strong results last week, which could be a sign of good things to come from other more dynamic tech companies.
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Monday: IMF releases world outlook; earnings from Philips
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The Fed meeting, US jobs, US unemployment and China Caixin are some of the events on Wednesday.
Two years ago, policymakers at the Fed thought that inflation would fall on its own once the supply problems were solved. Instead, price hikes proved both larger and longer-lasting than the central bank expected.
Financial markets are uneasy with the forecast. Many investors are betting that the central bank will soon start cutting interest rates despite warnings from Fed officials. In the last few weeks, the stock market and bond markets have rallied on the expectation of lower borrowing costs.
“We’re still in that really uncertain zone,” May said. “We know inflation will end the year lower than it is now and, in all honesty, quite lower, but the speed of the fall will depend on a lot of factors that are quite hard to predict.”
“We’re pulling off something really nice right now,” says Sojourner, who served as a senior economist for the Council of Economic Advisers in both the Obama and Trump administrations. If the Fed overcorrects, we will see jobs destroyed. Hopefully we can avoid that.”
Supercore inflation refers to prices that rise when workers get paid more for their services. Think about haircuts, electrical work and gardening. These prices are less volatile than food and energy and they show the direction of prices in the US economy.
Core services that exclude housing “may be the most important category for understanding the future evolution of core inflation,” Fed Chair Jerome Powell said recently.
Over the past year, an alphabet soup of otherwise wonky economic statistics have become household names as American families suffered through the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index), PCE (Personal Consumption Expenditures and ECI (Employment Cost Index).
The prices for food, fuel and housing have risen much more quickly than wages over the past year, due to huge consumer demand, supply chain issues and the war in Ukraine.
“The Fed focuses on supercore because it includes those prices that are more likely to be driven by the cost of labor, which the Fed can more directly impact through changes in interest rates,” he said.
While helpful for economists to drill down on inflation’s drivers, there is a practical drawback to stripping out volatile categories like housing, food and energy: These are non-negotiable expenses for most households.
There is a risk that the January Consumer Price Index will fall short. Some of December’s rosy headlines came from falling gas prices, which have since reversed.
Consumer prices were up by 6.4% last month compared to the same time last year according to the Labor Department. There has been a decrease in the annual inflation reading since October 2021.
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Federal Reserve chairman Jerome Powell doesn’t think that it will happen quickly and painlessly. We’ll have to increase our rates again and see if we’ve done enough, and that’s where the base case is for me.
The price of gas dropped during the first two weeks of February, but this can’t be used as a reason to lower prices at the pump.
The summer and spring driving seasons are entering higher-priced and drivers should be prepared for that, said Gladden. It will likely be a choppy year because of the uncertainty around the economy.
Used car prices have also acted as a brake on inflation, falling 8.8% last year and another 1.9% in January. The wholesale market suggests that used car prices could jump again in the coming months.
This week, the European Commission lowered its outlook for headline inflation as a result. It now projects that inflation among the 20 countries that use the euro will fall to 5.6% this year and 2.5% in 2024.
Nominal price of goods and services was 6.7% for January, its highest level since 1982, even as the price of food and gas has pulled back sharply.
The data points Arrival on Wednesday and Thursday increased investor anxiety about inflation. In January, retail sales increased by 3%, the biggest increase in almost two years. Getting Americans to spend less is a key part of the Fed’s anti-inflation campaign.
Power prices are still above historical averages which will pile pain on businesses and households for a long time. The International Energy Agency warned that Europe could see energy shortfalls this year unless demand is reduced further. That could push prices up again.
Inflation has tangled roots this time around. It was driven higher by the surge in demand for goods from people who were stuck at home because of the P.H., then made worse by the war in Ukraine. But, according to May of Oxford Economics, there’s still a lack of clarity on what exactly caused the situation to spin out of control, and what policymakers can do to fix it.
That share is a little hotter than the economists were expecting. Consensus estimates on Refinitiv projected the annual core index to land at 4.3% and extend what was a three-month stretch of cooling.
President Joe Biden said the higher-than-expected reading shows that the country has “more work to do” but lauded the progress the economy has made during his administration.
Biden said in a statement Friday that the unemployment rate has remained at or near a 50-year low and take- home pay has gone up. “As I’ve long said, there may be setbacks along the way, but we face global economic challenges from a position of strength.”
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The Personal Income and Outlays report is published by the BEA. The report includes the latest estimates on how much consumers are bringing in and how much they’re spending.
“It seems like consumers were feeling jolly in January,” Gregory Daco, EY Parthenon chief economist, told CNN Business in an interview. “They spent more freely across the board, really on all items, despite inflation being higher.”
The PCE report supports recent data that shows inflation is not falling at a faster rate than investors had been hoping for. The Fed is under increasing pressure to continue hiking rates for longer than markets anticipated just a few weeks ago.
All major indexes notched a losing week. The S&P 500 was down 2.7% marking its worst week so far of 2023. The decline in the barometer was its fourth straight losing week. The tech-laden stock market ended the week lower.
For the past year, the Fed has undertaken a heavy-handed approach to try to cool down decades-high inflation by cranking up interest rates in order to stifle demand.
“We are likely to experience surprises in this disinflationary process, it’s not just going to be a smooth ride back down to the low levels,” Daco said. “And so we’ll have to see whether the Fed panics in light of this recent report.”
Additionally, while monetary policy does act on a lag, the rapid increase in interest rates have filtered down to some areas of the economy, notably housing and financing.
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The Commerce Department report for retail sales for January gave a early indication that Americans would loosen their purse strings after a reined in holiday shopping season, but the pace of the report surprised on the upside.
Spending on durable goods (items like cars, appliances and TVs expected to last three or more years) increased 5.5% last month, buoyed by vehicle sales; non-durable goods (clothing, gas, groceries, etc.) increased 1.2%; and services gained 1.3%, according to the report.
Warm weather, a rebound of subdued holiday spending, seasonal data adjustments, and a strong and tight labor market may be some of the factors economists suggest contributed to January’s spending surge.
“I think we can’t just try and make excuses for the consumer: The consumer is more resilient than initially thought, and households are still spending relatively freely as of January,” Daco said.
However, given the high inflationary environment, rising interest rates, and the latest household debt data that showed some deterioration in Americans’ finances, the spending gains seen in January may not be lasting, he added.
The sentiment index is 17 points higher in June than it was at the lowest point in the survey’s history.
The Federal Reserve tracks inflation expectations. Increased wage demands could cause businesses to raise prices if consumers think prices will stay high.