FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 11, 2022

IN THIS ISSUE:

1. Consumer Prices Soar To Near 40-Year High In 2021

2. Inflation Increase Does Not Appear To Be Transitory

3. So, How High & How Long Will Inflation Persist?

4. The Very Disappointing Jobs Report For December

5. President Delays State Of The Union Address – Why?

Overview – Inflation Concerns Reign Supreme For 2022

As we kick of the New Year, it is clear that last year’s huge jump in inflation will be the overriding economic concern of 2022. Prices defied many economists’ expectations in 2021 by rising at the fastest pace in nearly 40 years. Everything from rent to the price of used cars to groceries climbed higher as the nation’s economy has recovered from the pandemic.

Strong consumer demand, continuing supply chain troubles and the emergence of the “omicron” variant of the coronavirus threaten to prolong sharply rising prices well into 2022, thus making inflation the premier economic challenge of the New Year.

That caused pain for consumers – eating into sizable wage gains last year. It also caused headaches for the Federal Reserve, which had forecast much less inflation, and the White House, which faced concerns even from some Democrats about whether plans for more federal spending would drive inflation higher still.

That’s what we’ll talk about today. Let’s begin by looking at the big rise in consumer prices last year and then discuss the prospects for 2022 and what options may be available to get inflation under control this year – or not.

Following that discussion, we’ll look at last Friday’s very disappointing jobs report for December. The government reported only 199,000 new jobs were created last month when over 400,000 were expected. This caused the official unemployment rate to fall to 3.9%, a new low.

Finally, I call to your attention the fact that President Biden has delayed his much anticipated first State Of The Union address from late January to March 1^st. The White House says the delay is due to an extra busy presidential schedule and the increasing spread of the Covid-19 virus. While it is not unusual for a president to delay the annual speech, this is the latest it will ever have been delivered. Just thought you might like to know.

Consumer Prices Soar To Near 40-Year high In 2021

There are numerous indexes which represent consumer prices in the US, but the most commonly cited is the Consumer Price Index (CPI) published by the US Labor Department, so that’s what we’ll use for illustration purposes.

After hovering around 2% for the last decade or longer, a combination of forces sent the CPI sharply higher in 2021. As you can see below, the CPI for all items covered soared to near 7% in the last half of 2021, while the CPI less the volatile food and energy components soared to 5%. These are the highest levels for US consumer prices since the early-to-mid 1980s, so nearly 40 years.

Overall, prices climbed 6.8% year-over-year for the 12 months ended November, the largest increase since June 1982. Higher prices were “broad-based,” per the Bureau of Labor Statistics, with substantial increases seen in the indexes for gasoline, shelter, food and new and used vehicles.  The gasoline index alone rose 6.1% in November. Of course, those items are key to the basic financial life of normal Americans, thereby stretching their bottom line even thinner.

Inflation Increase Does Not Appear To Be Transitory

Given that US consumer prices have risen so much more, and faster, than anyone expected, the Biden administration and the Federal Reserve were quick to label these increases as “transitory” or temporary and suggested prices could settle back to more normal levels in 2022.

As regular readers will recall, I have repeatedly questioned this characterization as transitory and have cautioned that inflation historically has a mind of its own. Such is certainly proving to be the case this time around.

In fact, in recent congressional testimony in December, Fed Chairman Jerome Powell suggested “retiring” the word transitory altogether, given that inflation has persisted longer and higher than expected.

While it does appear the Biden administration and the Fed are getting past the assumption that the current round of inflation is temporary, it remains to be seen what, if anything, the leadership can do to get it under control.

With US inflation high and the Federal Reserve expected to begin hiking short-term interest rates within months, President Joe Biden said last Friday he has faith in the central bank's ability to manage price increases while ensuring that businesses keep hiring.

"I want to be clear: I'm confident the Federal Reserve will act to achieve their dual goals of full employment and stable prices and make sure the price increases do not become entrenched over a long term, with the independence that they need," the president said at the White House.

At its latest policy meeting last month, Fed officials signaled three rate hikes in 2022, and minutes from the conference released last week showed them ready to move even more aggressively against inflation, if necessary.

Officials also believed the economy was nearing full employment, if it was not there already, although they also were wary of the Omicron variant of Covid-19, which has caused new cases to soar in recent weeks, the minutes said.

How High & How Long Will Inflation Persist?

So, how high is inflation going and how long is it likely to last? No one has a definitive answer, of course, but most forecasters expect the CPI to remain elevated at least several more months. Tomorrow morning, we get the latest CPI report for December which is expected to show consumer prices advancing at a 7% annual rate over the last 12 months.

Numerous supply chain issues continue to mess with consumer prices. Take used cars and trucks: While prices declined as the economy went into the recession in 2020, it is not the case that used cars and trucks became cheaper than they were in February 2020. In fact, they’ve never been more expensive.

The reasons for that hike are tied to the pandemic, to be sure. Supply is limited thanks to new car production being stymied by the ongoing chip shortage, people hanging onto their leases for longer and rental car companies—a major source of used cars—having fewer to unload after limiting their inventory when the pandemic struck. Plus, people who put off buying cars last year are suddenly competing for automobiles today.

The Fed has warned the public over these and other supply-chain issues, saying it’ll take time for sectors of the economy to get back to normal. Once these kinks are worked out, the Fed asserts, inflation will stop growing so quickly. The problem is, these kinks could last for more than a year, rather than a few months.

So, the persistent high prices we’re seeing could be with us for most of this year, if not longer. Given where the economy is at present, probably around 3-4% annual GDP, this will also keep upward pressure on prices. However, I don’t see consumer prices rising significantly from current levels.

I could be wrong, of course, time will tell. But even if prices don’t rise significantly from current levels, it could be next year before we see prices settle back to more normal levels.

The Very Disappointing Jobs Report For December

Last Friday’s unemployment report for December was a big disappointment in terms of new jobs created. Only 199,000 new jobs were created, less than half the 422,000 forecasters expected.

The weak jobs number did cause the headline unemployment rate to fall to a new low at 3.9% rather than the 4.1% expected. Wages increased more than expected, rising 4.7% year over year. Leisure and hospitality showed the biggest job gains by industry.

President Delays State Of The Union Address – Why?

In a curious development, the White House announced last week that President Biden’s first State Of The Union Address will be delayed until March 1^st. Normally, the key address is delivered in late January, but it is not unusual for presidents to move the date; however, this will be the latest date the SOTU address will ever have been delivered.

The White House said the presidential schedule is extra busy right now and cited the current surge of Covid-19 cases around the country as reasons for the delay. It also suggested the US's participation in the Beijing Winter Olympics has also contributed to the delay – not sure how that plays a role. Anyway, the president’s speech won’t be until March 1^st. Thought you might find that interesting, as I did. 

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Best New Year’s regards,

Gary D. Halbert

SPECIAL ARTICLES

US Inflation Surges to 39-Year High

Fed’s Powell Says “Transitory” No Longer Applicable to Inflation

Gary's Between the Lines: U.S. Jobs Market Is Smoking Hot, Record Quits

 

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