In the last month of 2023, prices unexpectedly went up in the U.S., showing how tricky it is for our economy to recover smoothly. An expert warned that because things are unpredictable, investors need to be more careful with their expectations.
A Reminder of Uncertainty
The CPI’s 0.3 percent increase in December, reported by the Labor Department, has reminded everyone of the unpredictable nature of economic recovery, especially in the U.S.
A Murky Business
According to Global X asset manager Jon Maier, “This uptick in CPI is a critical reminder of the unpredictable nature of economic recovery and the murkiness of the macro-economic data… “It suggests that investors might need to temper their expectations and remain vigilant.”
Strong Jobs Report
Contrary to inflation concerns, the U.S. economy added 216,000 jobs in December, maintaining the unemployment rate at 3.7 percent.
Soft Landing Hopes
This surprisingly strong jobs report, following the CPI release, has fueled optimism about achieving a “soft landing” — a scenario where price growth falls without plunging into a recession.
Impact on Federal Reserve’s Plans
The unexpected inflation and job growth have made the Federal Reserve reconsider its original plans to reduce interest rates in March.
Interest Rates to Remain Steady Until March
According to the CME FedWatch tool, financial markets now reflect a 69 percent chance of rate cuts in March, while January remains steady.
Inflation On The Move
While the headline inflation has fallen from its pandemic peak, concerns linger. “Core” inflation, excluding energy and food, remained flat on the month, signaling a 3.9-percent annual increase, down from 4 percent in November.
Housing Costs Remain a Challenge
Despite the overall inflation scenario, housing costs continue to be a significant contributor. Housing inflation stands at a 6.2-percent annual increase for December, with car insurance prices soaring at a 20.3-percent annual increase.
A “Persistent” Enemy
According to analyst Greg McBride, “Shelter and motor vehicle insurance continue to be the persistent trouble spots, extending the streak of outsized monthly increases.”
Shelter the Main Issue
“Shelter remains the largest contributor, responsible for more than half of this month’s increase in the headline CPI and more than two-thirds of the increase in core CPI over the past year,” McBride said.
Housing Prices and Inflation
Although housing costs exhibited a downward trend, Lindsay Owens of Ground Collaborative argued that high-interest rates exacerbate the housing crisis, urging the Fed to reconsider its approach, “Housing is the last mile on inflation and the only way to fight it is by increasing our housing supply,” she said.
Federal Reserve Critique
“Instead,” Owens continued, “the Fed’s high-interest rates are making this crisis worse by forcing potential buyers back into the rental market and tanking the construction of new housing,” she argued.
Owens Statement Grows Concerns
Owens closed her statement by admitting, “A higher-for-longer interest rate environment is exactly the wrong approach to bringing down housing costs. Shelter inflation should give the Fed even more incentive to cut rates.”
Impacts on Yields and Mortgage Rates
The expectation of fewer interest rate cuts in 2024 could lead to increased yields, according to Austin Schaul from Avantax, affecting mortgage rates.
Schaul Predicts Boost to Mortgage Rates
Schaul wrote, “There’s reason to believe the shelter component of inflation should start to weaken, but in the absence of an economic slump or substantial disinflation during the coming months, we may see Treasury yields continue to drift higher as markets curtail their expectations for the easing of monetary policy,” potentially resulting in boosted mortgage rates.
Energy Costs Analyzed
Gasoline prices dropped by 1.9 percent, household gas by 13.8 percent, and overall energy deflated by 2 percent, benefitting consumers, but ultimately damaging the energy sector.
Food Fluctuations
Food inflation in December increased by 2.7 percent, “The last few years of commodity price volatility have coincided with a period of record profit growth by global energy and food traders,” said the UN Economists.
Good News on Healthy Deflation
While fresh fruit and vegetables experienced deflation, eggs witnessed a significant 23.8 percent decrease. However, a lingering risk remains, with the UN Economists revealing a worrying statistic.
UN Economists Reveal Profits For Big Four
“In the area of food trading, the four companies that conservatively account for about 70 per cent of the global food market share registered a dramatic rise in profits during 2021 – 2022,” the UN said.
Cost of Living Crisis Not Avoided
Despite more jobs being created in December, the economy still has a long way to go before it’s on track to shift Americans out of this cost-of-living crisis.
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The content of this article is for informational purposes only and does not constitute or replace professional financial advice.
