FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 18, 2022

IN THIS ISSUE:

1. Overview - Inflation May Go Higher Than We Think

2. Inflation Hits 7% In December, Get Used To It For A While

3. Producer Price Index Surges Record Amount in December

4. Keep All Your Financial Information in One Secure Place

Overview – Inflation May Go Higher Than We Think

Soaring US inflation continues to dominate the economic headlines, as I have predicted in recent weeks. There has not been much in the way of other meaningful economic news. The Consumer Price Index hit another new high in December, rising to the highest level in 39 years, and this is definitely getting consumers’ attention. As a result, consumer sentiment fell to the lowest level in a decade in December. No big surprise there.

While I have warned that inflation could go to the current high level, and it might stay there for a while, I have also suggested it shouldn’t go much higher. I need to alter that forecast today because many of the underlying factors which affect price inflation are suggesting we haven’t seen the top yet. To understand why, we need to take a close look at the Producer Price Index, which I will do as we go along today.

Retail sales fell sharply in December, which caused many forecasters to sound alarm bells. But this should not have come as a surprise. As I have discussed previously, consumers accelerated holiday shopping due to warnings about supply shortages last year. We knew this early buying was pulling future demand forward, which would mean some softer retail sales down the road. That is what we are seeing now.

So all in all, the economy still looks to be in pretty good shape for 2022. In fact, most forecasters expect a positive economic performance this year overall, although most are adjusting their forecasts lower in light of weaker jobs and retail sales for December. Still, all indications are this will be another year of positive economic growth.

Inflation Hits 7% In December, Get Used To It For A While

Let’s start with the latest inflation readings since they are grabbing all the headlines these days. The Consumer Price Index jumped 0.5% in December, pushing the annual rate to 7%, the highest since 1982 (39 years).

Excluding food and energy, so-called “core” CPI was up 5.5% on the year, the biggest growth since February 1991. The increases were in line with economists pre-report expectations, so there were no big reactions in the financial markets.

Producer Price Index Surges Record Amount in December

While the CPI gets most of the attention in the financial media, the Producer Price Index is actually more predictive of where prices are headed and thus more important. Whereas the CPI represents prices paid by actual consumers, the Producer Price Index (PPI) represents prices paid by manufacturers and others to make things.

The Producer Price Index consists of a weighted index of goods prices at wholesale. PPI is divided into three levels. The first is the PPI Commodity Index, which shows the average price change over a certain time period (usually a month) for commodities like crude oil and coal.

The second level is the PPI Stage of Processing (SOP), which consists of goods that are in a manufacturing stage between raw and finished and will be sold to other manufacturers to create the finished goods. Examples include cotton, gasoline and steel.

The third and final PPI level consists of Finished Goods. That is, they have undergone their final stage of manufacturing and will be sold to consumers.

The PPI rose 0.2% in December following the jump of 1.0% in November. PPI rose a whopping 9.7% over the 12 months ended December, the largest one year rise ever. That is bad news for everyone because it means inflation can still go considerably higher. As a result, let’s take a closer look at the PPI today.

There are many different materials that go into the PPI. Some are used more frequently than others. For example, the costs of most of the core raw chemicals that make up just about everything we use in our daily lives are skyrocketing and show no sign of future relief. 

When we unpeel the PPI and look closely at the costs of the core materials and labor used in manufacturing, farming and construction, etc., we find that many prices have risen much, much more than the reported 9.7% average over the last year. And those higher prices are ultimately going to find their way to customers in the coming months. 

For example, aluminum is used in just about all sectors of the economy, and the cost of this core material has surged 37% in the past year and shows no sign of letting up. Tin, which is used as a protective coating and alloy for steel, has gone up 116%. Speaking of steel, the cost of iron and steel has shot up 87% in the last 12 months.

These are just a few examples of producer prices which have gone up significantly in the last year, but there are many others. Yes, many of these materials are commodities, and the price of commodities can fluctuate. But there's no indication our worldwide supply chain and labor shortage problems are going to be resolved any time soon.

Plus, with countries such as China shutting down entire regions recently due to the omicron virus, it looks like these materials – and the labor to produce them – will continue to be in short supply, with higher prices as a result.

All in all, the total costs of manufacturing alone have increased more than 15% over the past year. But it's not just the manufacturers that are suffering. Farmers are paying almost 16% more to feed their animals and 92% more for potash, which is one of the main ingredients in fertilizer.

Construction businesses are seeing enormous increases in the costs of lumber. After big ups and downs, lumber costs were up almost 19% last year, while concrete rose almost 9%. In fact, the costs of some construction materials have increased 35% last year. Plus, shipping costs were up overall a whopping 25% in 2021.

Let's not forget labor. Payroll company Paychex reports last week that its hundreds of thousands of customers are now paying an average wage of $30 per hour, an increase of 4.27 percent, which is the highest level since Paychex began reporting these numbers more than 10 years ago. Total compensation of all salaried and hourly employees serviced by Paychex rose more than 11% last year.

The bottom line is that while I have suggested inflation may not go a lot higher this year, the latest data from the Producer Price Index report suggest we’ve not seen the highs yet. But hopefully, we’re getting close.

Keep All Your Financial Information in One Secure Place

I want to remind all of my clients and readers that we have a great tool for keeping all of your financial information digitally in one safe, secure place. It’s called Your Financial Life and it’s FREE of charge from Halbert Wealth Management.

The idea is to have all of your financial information (account numbers, custodians, contact info, etc.) in one digital place for easy access. When there are changes to any of your financial information, you can easily update your record to keep it current.

You can download either of two digital versions of Your Financial Life, one in Microsoft Word format and a second which can be completed using the free version of Adobe Reader (available at www.adobe.com).

Either version can be used to save your important information. The file can be password protected and then be easily stored on a removable disk or flash drive and placed in a secure location that can be accessed by those who need it.

And speaking of those who need it, think YOUR SPOUSE. I can’t tell you how many times over the years when a wife has called us after her husband (our client) suddenly passed way, and she has little or no idea where the family’s investments are held, much less what (if anything) to do with them. We are happy to help them sort it all out and make a plan for going forward.

Important Note: If you are a client of Halbert Wealth Management please make sure your spouse knows to CALL US before making any decisions on the investments you hold with us. We often see surviving spouses decide to liquidate all of the investments simply because they do not understand them, even if doing so may be harmful.

We will educate them about the reasons you have investments with us and determine if they are still suitable. We want to help you make the best decision however we can.

Download your FREE copy of Your Financial Life today. I really encourage you to do this and make sure your chosen loved ones know where this critical information is stored. I also recommend that you encourage your loved ones to download Your Financial Life to store their own financial information in one safe, secure place.

With tax time approaching, now may be the time to gather up your financial information (account numbers, custodians, contact info, etc.) and enter the info into our FREE Your Financial Life soon. Remember it is very easy to update all your information as things change. And we’ve also included space for you to make comments or notes regarding each investment.

So, download the program today and resolve to get your financial information entered as soon as possible. I promise you’ll be glad you did. And your spouse will be happy, too!

All the best,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.