David Goebel, Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on the latest US CPI inflation data:
US December headline CPI inflation rose 7.0% from a year ago, in line with economists’ expectations and exceeding the 6.8% in November. This is the largest year-over-year increase since June 1982. Excluding food and energy, the core CPI inflation measure rose 5.5%, marginally ahead of expectations of 5.4%, an increase from 4.9% in November. Headline inflation rose 0.5% on the month, with the core measure rising 0.6%.
Inflationary pressures in the US continue. Energy prices actually decreased in December by 0.4% as both Motor Fuel and Utility Piped Gas reversed their recent increases. Food prices, another volatile component increased by 0.5% in December.
Focusing on the ‘core’ components, goods prices continue to rise. New and used cars have been a key feature of the inflation report for many months now, and make up around 8% of the index. In December they rose 2.1%, the highest monthly figure since June, as the emergent omicron variant took its toll on already weakened supply chains. However, as the global economy gets back on its feet, supply chains should recover and as such this area isn’t likely to be a driver of longer/sticker inflation.
Shelter is an important component constituting around one third of the broad basket. In December it increased by 0.4%, more or less in line with readings since September. Although shelter could represent a source of ‘stickier’ inflation, this component is a lagging indicator, and timelier indicators are more useful to us. One is Apartment List, an online marketplace for over five million flat listings in the US, which showed an average decrease in month-on-month rents (of 0.2%) in its December report, for the first time since December 2020. This represents a return to the usual seasonality (where rents increase in H1 and decrease towards the end of the year), and could suggest that the pandemic-related rent spike has passed.
In terms of services, Medical Care increased by 0.3% while Transport fell by 0.3% over the month but these categories are affected by the idiosyncrasies of the omicron variant. The broad ‘Other Personal Services’ category (including haircuts to legal services) increased by 0.7%. This category is important because it could be a useful measure as to how much wage gains are spreading through the economy, and therefore how likely an unwelcome wage-price spiral is to develop.
Economists expect US inflation to have peaked and inflationary pressures to subside slowly over the course of 2022, although remaining well above target. We are starting to see tentative signs that this may be the case, but it is too early to say with any conviction. Further severe COVID-19 variants or continuing stubbornly high energy prices represent two obvious risks to this scenario. Even falling inflation still leaves bond investors looking at deeply negative real yields, leading us to continue to favour equities over bonds, which are supported by both economic growth and strong earnings. The risk of inflation is limited as long as it remains under control.