|By Tim Courtney, Chief Investment Officer|
Inflation remains well above historical averages. During 2021, the consumer price index (CPI) jumped 7% ― its largest 12-month surge in nearly 40 years.1
The sharpest price increases stem from goods and commodities, including food, energy and base metals, as supply chain disruptions persist.2 While most expect the prices of these raw materials to ease in the coming months, there are still other factors that may continue to boost inflation.
For one, rising rents have not been fully factored into CPI data yet. According to Bloomberg Economics’ David Wilcox, “The CPI aims to measure rents on all units, newly occupied or not. The latest twitch in the management company’s front office may not be relevant for the bulk of renters until many months later, when their leases turn over.” This means that housing costs will be a force keeping CPI numbers higher well through this year.3
A larger issue, however, fueling inflation is the ongoing labor shortage. You don’t have to look far to see this playing out firsthand, from “help wanted” signs in storefronts to longer wait times in restaurants to headlines regarding the “Great Resignation.” In fact, the U.S. Bureau of Labor Statistics reported a record 4.5 million American workers quit their jobs in November 2021.4 Meanwhile, the U.S. still has roughly 3.6 million fewer jobs filled than in 2019, yet gross domestic product (GDP) has fully recovered.5,6 With a smaller workforce producing the same economic output ― combined with the emotional toll of the pandemic ― you can imagine why American employees are feeling increasingly stressed and burned out.
One potential positive from these high quit numbers: It may be that a good amount of these resignations are by workers who plan to open their own business. This would be welcome following the lockdowns when so many small businesses ceased operations.
Still, as a result of the labor shortage, we are seeing wage inflation as companies entice employees with higher compensation. According to the Bureau of Labor Statistics, annualized average hourly earnings climbed by 4.7% in December 2021.7 This is positive for household wealth and confidence but certainly creates a higher inflation risk for investors.
While robotics and automation may alleviate some worker shortage pain points, it will take time for these to work their way through the economy. Until then, many companies, which previously were hesitant to raise their prices, are planning price increases for 2022 to protect their margins.8 This is one way that holding stocks can be a hedge against higher than average inflation.
We don’t anticipate seeing 7% inflation forever, but inflation remaining well above the 1.5% level we’ve gotten used to in recent years could become the norm. If you have any questions about inflation or inflation-hedges, please contact your Exencial advisor.
- USA Today (1/12/22) — Inflation reaches highest level since 1982 as consumer prices jump 7% in 2021
- Bloomberg (9/13/21) — Commodities prices are surging again
- Bloomberg (12/13/21) — U.S. home-price surge looks much tamer in government CPI report
- com (1/4/22) — A record 4.5 million workers quit their jobs in November
- The Wall Street Journal (1/13/22) — As U.S. approaches ‘full employment,’ new inflation risks emerge
- The Washington Post (7/29/21) — U.S. economy grew at annual rate of 6.5% between April and June, marking full recovery from pandemic
- S&P Global (1/10/22) — Economic research: U.S. economic roundup: Tight job market allows for more Fed tightening
- Reuters (9/22/21) — Investors watch U.S. companies’ record profit margins as costs rise further
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
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