Market Perspective

Inflation Climbs


Overview: Since the Federal Reserve meeting on January 26, the economic news has revealed no significant surprises. Inflation continued to rise, and the labor market remained extremely tight. Mortgage rates ended the week slightly lower.

 

The inflation indicator favored by the Fed is the Personal Consumption Expenditures (PCE) Price Index, and the most recent report revealed yet another increase. In December, core PCE was 4.9% higher than a year ago, up from 4.7% last month and the highest annual rate since 1983. There are many reasons why the annual core inflation rate has jumped from the readings below 2% seen during the first three months of 2021, including a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain shortages. One of the big questions for investors is how quickly inflation will moderate as pandemic-related disruptions are resolved.

The JOLTS report measures job openings and labor turnover rates, and the latest data indicated that the labor market remains very tight. At the end of December, there were a massive 10.9 million job openings, close to the recent record high, and about 4 million more than in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A very large number of employees also willingly left their jobs in December. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.

Gross domestic product (GDP), the broadest measure of economic activity, was better than expected during the final three months of the year. Fourth quarter GDP showed annualized growth of 6.9%, above the consensus forecast of 5.5%, and up from just 2.3% during the third quarter. The outperformance was mostly due to the rebuilding of inventories and strong consumer spending. GDP growth for all of 2021 was the highest since 1984, as the economy continued to recover from the effects of the pandemic.

 

Core PCE (annual % change)

 

Week Ahead


Feb. 3

Institute for Supply Management (ISM) Services Index

European Central Bank meeting


Feb. 4

Employment Report