Inflation, Omicron, Consumer Spending Remain Concerns


Overview: Over the past week, news about the omicron variant, stronger than expected inflation data, a shortfall in consumer spending, and the expected changes in future Federal Reserve policy caused a lot of daily volatility. However, these influences were roughly offsetting, and mortgage rates ended the week with little change.

 

Wednesday’s highly anticipated Fed meeting confirmed that monetary policy will be tightened at a faster pace from the extremely loose stance put in place early in the pandemic. According to the statement, the Fed will double the rate at which it tapers (scales back) its bond purchase program. In addition, officials now forecast that there will be three federal funds rate increases next year and three more in 2023. The news about both the taper and the projections for rate hikes were very close to investor expectations. The statement also noted that downside risks remain to the outlook for economic growth, primarily related to the pandemic. Regarding inflation, officials expect very high readings to continue next year, but then a return to more normal levels in 2023.


The Consumer Price Index (CPI) is a popular inflation indicator that looks at price changes for a broad range of goods and services. Investors generally prefer to evaluate core CPI, which excludes the volatile food and energy components, to determine the longer-term trend. In November, core CPI was 4.9% higher than a year ago, up from an annual rate of increase of 4.6% last month, and the highest level since 1991.

Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. In October, retail sales jumped 1.7% from September, which was far above the consensus forecast. However, November retail sales rose just 0.3% from October, which was well short of expectations. It has been a challenging year to predict holiday spending, since many consumers started shopping earlier than usual due to shortages of many products. Looking at October and November combined, it has been a strong period by historical standards.

 

Core CPI (annual % change)


Week Ahead

December 16 — New Residential Construction report (aka Housing Starts)

December 22 — Existing-Home Sales report

December 23 — Core Personal Consumption Expenditures (PCE) Price Index