Inflationary Whack-A-Mole

Sep 19, 2023

By Ben Norris, CFA, Senior Investment Strategist, Vice President
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We’ve spilled a lot of ink on the topic of inflation over the past two years, and it’s beginning to feel like we’ll never be able to write another weekly recap without at least a passing mention of it. The absolute magnitude and persistence of inflationary pressure has been a surprise to many after years of very low inflation, despite historically loose monetary policy following the Great Financial Crisis (GFC). Interest rates were effectively held at zero for the better part of a decade—a condition that economic theory says should be massively stimulative. Yet, over that period, both economic growth and inflation were tepid at best. It finally took a combination of low interest rates and a flood of money supply to finally push the economy into a high-inflation, medium-growth environment.

Now that inflation has taken hold, it has been much more difficult to rein in than initially projected by many prognosticators (this author included). Much of this is truly because of an excess supply of money that allowed inflated spending power to chase limited resources, but at least some is a result of other, more nuanced effects of the pandemic. For example, semiconductor manufacturers shifted their focus to supplying technologies that would allow working from home during the pandemic. As a result, automotive manufacturers weren’t able to secure the semiconductors they needed to produce the new cars that consumers, who were eager to spend stimulus checks, wanted. (It also takes a long time to stop and restart global supply chains.) The low supply of new cars meant that used cars began to sell at a premium, and that premium began to show up in inflation calculations. Used car and truck prices were up more than 35% from pre-pandemic levels, according to the U.S. Consumer Price Index (CPI).

While auto prices have been a real pain for consumers, they are a relatively small part of consumer budgets and, thus, inflation calculations. What has been more painful for consumers, and the culprit for much of the ongoing inflation fight, is the rise in housing costs over the past two years. Homebuilders have been subject to many of the same supply chain disruptions that automotive manufacturers faced, and the supply of new homes (for consumers who increasingly want more space as they work from home) has remained at frustratingly low levels. As the price of new homes has increased with greater demand, many consumers have been priced out of the market—a combination of higher home prices and mortgage rates has caused the typical monthly payment to surge. The median selling price for an existing home is up more than 12% over the past two years, while mortgage rates have increased from under 3% to more than 7% alongside the U.S. Federal Reserve’s (Fed’s) rate hiking campaign. This means that a typical monthly mortgage payment has gone from about $1,550 to more than $2,700 for a 30-year loan. If you’re an existing homeowner you’re probably not losing much sleep over this because odds are you locked in a low mortgage rate over the past decade. But, if you’re a first-time homebuyer or a renter, this has been a painful development.

The good news is that housing inflation has started to cool off as prices stabilize, although mortgage rates are likely to remain elevated. The bad news is that now other parts of the consumer budget look like they’re about to see renewed inflationary pressure. Last week, the United Auto Workers (UAW)—a union representing roughly 150,000 employees of the “Big Three” auto manufacturers—authorized a strike that saw more than 13,000 union members walk off their jobs. UAW is looking for large pay increases for hourly workers to match the growth in executive compensation. The situation is still developing, but we can anticipate that the strike will likely lead to renewed pressure on auto prices. Supply of new cars may fall once again, and prices will have to be adjusted higher to reflect increased labor costs. At the same time, crude oil prices have begun to rise after 18 months of relative stability. Brent Crude surpassed $90/barrel for the first time in more than a year, and many forecasters are now looking for prices to eclipse $100/barrel as OPEC and other oil producers keep supply in check. The Fed probably feels like they’re playing a game of whack-a-mole with its fight against inflation. As soon as the Fed begins to see progress on categories like food and housing, auto prices and energy costs pop back up.

Last week’s CPI and Producer Price Index (PPI) reports reflected this development and came in mixed relative to expectations. Year-over-year shelter inflation has started to fall and is expected to continue lower as the base effect and higher mortgage costs are reflected in numbers. However, rising energy costs, up 5.6% for the month, were a headwind and drove much of the monthly gain in CPI. Gasoline prices were also up 10.6% during the same period, a development that will likely begin to weigh on consumer sentiment. Compared to last year, CPI and PPI increased 3.7% and 0.8%, respectively. Core CPI, which removes the impact of food and energy costs, was up 4.3%, reflecting that the Fed still has work to do to bring inflation back down to its target average of 2%, and that tight monetary policy isn’t going anywhere.

With a busy backdrop of economic data, U.S. stocks finished last week mixed and lagged their international counterparts. The Dow Jones Industrial Average was the only major U.S. index to finish the week in positive territory. Large value stocks outperformed on the week, while growth lagged. The S&P 500 finished marginally lower, while the growth-oriented NASDAQ Composite lost 0.4%. The Utilities, Consumer Discretionary and Financials sectors outperformed, while the Materials, Industrials and Technology sectors lost ground. Technology was particularly weak, losing 2.2%, as a few influential mega-cap stocks underperformed. The MSCI EAFE and Emerging Markets indices gained 1.7% and 1.2%, respectively, as investors anticipated improvements in international economies following Chinese stimulus. While stocks finished the week mixed, bond yields have moved steadily higher over the past two months and are at levels not seen since before the GFC. The Treasury yield curve remains inverted, as it has been since October of last year. Last week marked the longest sustained yield curve inversion since the 1960s. An inverted yield curve is typically seen as a precursor to a recession, but the U.S. economy has remained surprisingly resilient over the past 11 months, despite the Fed’s ongoing tightening cycle. Some have abandoned calls for a recession, with recent GDP numbers that have surprised to the upside, but we think that there is still a possibility for at least a small economic slowdown on the horizon, especially considering just how far the Fed has tightened this cycle.

Looking ahead to this week, investor focus will be on Wednesday’s FOMC decision on interest rates and the subsequent press conference with Fed Chair Jerome Powell. Consensus sees the Fed holding steady this week before likely resuming rate hikes at its November meeting. However, additional economic data released between now and November could still alter that path. Elsewhere on the economic calendar, updates on the U.S. housing market will be of interest as soaring mortgage rates have slowed sales of existing homes while providing a boost to homebuilders. Finally, we’ll have an eye on Thursday’s update of the U.S. Leading Economic Index (LEI), which has fallen for 16 consecutive months. The U.S. economy has fallen into a recession each time the U.S. LEI faced similar circumstances.






10:00 AM

Home Builder Confidence Index




8:30 AM

Housing Starts




8:30 AM

Building Permits




2:00 PM

Fed Interest Rate Decision

2:30 PM

Fed Chair Powell Press Conference

8:30 AM

Initial jobless claims

Sept. 16



8:30 AM

Philly Fed Manufacturing Survey




10:00 AM

U.S. Leading Economic Indicators




10:00 AM

Existing Home Sales




9:45 AM

Services PMI




9:45 AM

Manufacturing PMI





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