“Highly attuned to current inflation news”
In addition to the latest supply shortages (Avocados!?) and following on last week’s CPI data, the inflation beatings continue. PPI remains high like its consumer cousin, with the latest reading showing a 9.7% increase over the past year, a would-be record only overshadowed by the YoY readings from November and December. The Empire Fed’s Manufacturing Index was “little changed” though the prices received index rose to a record high “, signaling ongoing substantial increases in both input prices and selling prices”. This was echoed by the Philadelphia Fed’s survey, which showed cooling growth and yet, “the price indexes remained elevated.”
Yet, despite the price pressures, the consumer in aggregate appears to be impervious.
This week’s retail sales data saw a 3.8% jump in January compared to December, significantly beating estimates. The revised December numbers helped this monthly figure, but such revisions had nothing to do with the 13% YoY increase that was thanks in part to “a 33.4% surge in gasoline station sales and a 21.9% burst in clothing stores”.
The question remains as to how long can consumers keep this up. While retail sales were robust in January, more recent readings on sentiment are gloomy. Michigan’s latest survey saw consumer sentiment reach “its worst level in a decade”, “driven by weakening personal financial prospects” courtesy of “rising inflation, less confidence in the government’s economic policies, and the least favorable long term economic outlook in a decade”. Additionally, and perhaps ominously for markets, surveyed households noted a “falling likelihood of stock price increases in 2022” (and this was before Zoltan Pozsar, whose work we’ve covered before, warned that the market needs “a Volcker moment”).
On the plus side, though consumers may not be so pleased about inflation, there’s again hope that the worst is over. Accompanying its latest Survey of Consumer Expectations, which showed a cooling off in both one-year ahead and three-year ahead inflation expectations, the New York Fed published a blog on the dynamics underlying consumers’ inflation expectations. Finding that consumers’ “one-year-ahead inflation expectations are very responsive to inflation surprises”, the researchers were heartened by the finding that the pass-through from shorter-term to longer-term expectations “has declined during the pandemic relative to the pre-pandemic period” and deduced from their findings that consumers “do not view the current elevated inflation as very long-lasting”.
Please note: Thoughts From The Divide is taking a brief break and will be back on March 10th!
