Tuesday, January 25, 2022

US Inflation at 39-Year High What’s Causing the Huge Increase in Prices?

Torsten Asmus/iStock via Getty Images

In the latest edition of Market Week in Review, North America Chief Investment Strategist, Paul Eitelman and Senior Client Investment Analyst Chris Kyle discuss US inflation data for December, the US Federal Reserve’s (Fed) tightening monetary policy and the recent Discussed better performance. The relative value of growth stocks.

Durable goods prices, shelter costs fuel US inflation up 7%

On January 12, the US Department of Labor reported that its consumer price index (CPI) – which measures how much consumers pay for a wide range of goods and services – rose 7% in December on a year-on-year basis. Hui.

“This suggests that US inflation is red-hot right now,” Eitelman said, noting that the CPI has grown at the fastest pace since 1982. Even core inflation, which separates prices from the more volatile food and energy sectors, rose to 5.5. % Last month, he commented.

Importantly, because reports of inflation fell in line with most economists’ expectations, the market’s reaction to the numbers was relatively muted, Eitelman said. “Fixed income markets in particular yawn at the data,” he said, explaining that US government bond yields – which have risen sharply since the beginning of 2022 – remained fairly stable in the wake of the announcement.

Eitelman noted that the biggest contributors to December’s rise in inflation came from familiar categories, including durable goods and shelter. “Consumer demand has been most concentrated in the durable goods category, given that many people stay at home as the pandemic continues,” he said, noting that supply chain issues have plagued this category. made particularly difficult. Rising shelter costs are also adding to inflationary pressures, Eitelman commented, due to the strength of the US housing market.

On a more encouraging note, he pointed out that so far, there is not much evidence to show that inflation in the services sector is accelerating. “If this happens, it would demonstrate that higher wages were beginning to flow into higher prices in the broader U.S. economy — but so far, that hasn’t happened,” Eitelman said.

How many Fed rate hikes is possible in 2022?

How inflation is likely to skyrocket Fed policy this year, Eitelman said, adding that the US central bank has worked hard over the past few months to shift a greater emphasis to a risk-management approach to its monetary policy strategy.

“Fed officials have conveyed that there is some desire to raise rates sooner than originally anticipated, to give the central bank the option of raising rates even further down the line, longer than inflation estimates.” remain high till now,” he explained.

More importantly, the Fed will likely increase borrowing costs at its upcoming March 15-16 meeting, Eitelman said. “After that, I think it is reasonable to expect that the Fed will continue to hike rates once a quarter – but that is by no means certain,” he emphasized.

Itelman pointed out that the number of times the central bank will raise rates in 2022 will depend on how economic growth and inflation play out this year. “The Omicron version of COVID-19 continues to pose a risk to economic growth, and there is also a very distinct possibility that the rate of inflation could decline sharply in the second half of the year,” he said.

Price outperforms growth as interest rates rise

Eitelman and Kyle conclude the segment by taking a look at how the markets have performed so far in the new year. One thing that really stands out, Eitelman said, is the strong style rotation from growth factor to value factor in equity markets.

“Growth stocks are more sensitive to rising interest rates, as investors foresee future cash flows. Therefore, higher rates penalize the valuation of growth stocks relative to value stocks — and that’s exactly what we covered for this year at the Fed.” Have seen so far with the increase in telegraphing rate,” he explained.

The magnitude of the rotation toward value stocks has been quite large, Eitelman said, with the value factor outperforming the global market by a growth factor of about 700 basis points.

“I think there is some potential for this outperformance to continue this year, as value stocks are still trading relatively cheap compared to historical norms. Furthermore, amid expectations of upward-trend growth this year, better There is also potential for corporate profitability,” he said, noting that some of the biggest gains could be in the rear-view mirror.

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Editor’s Note: The summary bullets for this article were selected by Seeking Alpha editors.

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