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From housing to healthcare, sticky inflation persists as the Fed grapples with policy challenges. Get insights into the numbers and what they mean for the economy.
Anticipation. If you live in the US or have visited, despite how sophisticated your palette, you have encountered tomato ketchup. Come on, be truthful, you have experienced the painful anticipation of that ketchup slowly pouring from the jar. You hold it upside down… and wait… and wait. You think you see the ketchup getting close to the edge… but… no… none yet. You are patient as your food gets cold, but you can no longer wait. You shake the bottle with all your might, and… still nothing. You wonder if there is even any ketchup in the bottle. What was supposed to be an easy, relaxing meal suddenly gets stressful. What, you never tried it? Ok, but I am sure that you have had a similar experience with molasses, treacle, zuckerrübensirup, mélasse, date syrup, mai ya tang, or kuromitsu. If you haven’t had any of those experiences, you need to get out of the house more. 🤣
On Friday, we got our last inflation figure for the year that was supposed to see us on or near the Fed’s target. The PCE Price Index is the Fed’s favorite gauge of inflation, and it came in at a slightly lower than expected 2.4% after printing a 2.3% in the prior month. Two things to note at a high level. PCE stands for Personal Consumption Expenditures, a technical term for consumption. Second, the Fed often talks about Core PCE inflation which is just topline inflation without food and energy. Those two items tend to be volatile on the month-to-month basis, so excluding allows economists to better understand trends. Very practical, but, of course, very unrealistic, because, I don’t know about you, but a big part of my monthly budget is fuel and food, so if that is costing more, well, I am feeling it. Oh, and Powell acknowledged as much in his last press conference, though the Core number is still the top dog.
Speaking of the Fed, it was less than a week ago that it gave us all a gut punch by suggesting that rates may not come down as quickly and as much as previously expected in 2025. This revelation sent stocks on a 2-day free fall. One of the key takeaways from last week’s FOMC meeting was that the Fed was no longer focused on high unemployment, which was the initial driver of its first, oversized rate cut, but rather its focus was back on inflation. Inflation which was not only stubbornly stalled above its 2% target but also ticked up slightly in prior months. Well, seeing as those FOMC folks are the ones making the policy, it is reasonable for us to be aware of what is driving their votes. That moved all eyes to Friday’s number.
As I most often do after these releases, I share some of the highlights with hopes of getting a better understanding of what is happening below the surface. Because you already know, BECAUSE YOU ARE A REGULAR READER, that services inflation is the holdout, I downloaded all the numbers and drilled down four levels to 129 sub-categories. Here is a chart of the top 25 biggest gainers over last year. Have a look.
Now, I am not going to go through all of them, but it is important to point out that culprit #1 is housing cost, which you already know. It’s still bad. You might have noticed that financial services fees went up as well. That has to do with the fact that those fees are based on Assets Under Management which grew with this year’s gains. If you continue on down the list, you will see lots of related to healthcare… also not surprising. Auto insurance is on the list, are you surprised? There are food services, which is dining out, and of course, takeout meals. Does any of this surprise you? It shouldn’t because these have been a problem for quite some time. Now, for a change, I am going to give you something positive to think about. NOT EVERYTHING COSTS MORE this year over last. I plotted the bottom 25 on the list and here it is. Have a look.
Are you surprised with some of these? Do you remember how bad used and new car inflation was at some point? Those actually deflated since last year, along with fuel oil and gasoline, another group of items that was troublesome and stressful during the early stages of inflation. So, indeed some things are actually getting better. Why? Well, there are so many reasons for it, the least of which is the Fed’s aggressive monetary tightening. Now, after a full percentage points of easing, tightening is beginning to work its way back into the quiet discussions. 🫣
Let’s have another look at the charts above, specifically the top 25. You will notice that all those are basic necessities with few, if any, substitutes. You may also notice that higher interest rates may actually exacerbate inflation in those areas. The Fed, in its own words, is committed to continue the fight on inflation, choosing to take it slow, remaining data dependent, while, in reality, its current policy may be making things worse. The Fed will enter the year with a waiting game, and the markets will be captive to its policy. That means we will be waiting and anticipating again. But don’t worry, it will get there, just like the ketchup that almost always finally flows, but it is usually too much and too late.
FRIDAY’S MARKETS
Markets rallied as traders bought the dip, emboldened by a cooler-than-expected inflation figure. Traders remembered that the shift in Fed policy was already factored in before the announcement and that the selloff merely shook out the weak hands. Michigan Sentiment was revised down but was still higher than last month’s—ok for now.
NEXT UP
- New Home Sales (November) may have increased by 9.8% after falling by 17.3% in October.
- Consumer Confidence (December) probably climbed to 113.2 from 111.7.
- Durable Goods Orders (November) are expected to have slipped by 0.3% after gaining as much in the prior period.
- The week ahead will be light with an early close and the holiday. Download the attached economic calendar for times and details.
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