Inflation sizzles | Grant Thorton
A year after inflation started accelerating in response to robust demand and supply chain issues, it is hitting a new pandemic high. The consumer price index (CPI) jumped 1.2% from February in March and 8.5% from a year ago. This is the fastest annual rate since 1981.
Food and energy costs have soared in response to war in Ukraine and a global outbreak of bird flu. Proteins – meat, poultry, fish and eggs – jumped 13.7% from a year ago, the seventh consecutive month of double-digit gains. This is the longest and deepest protein price spike since the late 1970s. Rising food prices will get worse before they get better and hit hard those who can least afford it. allow it, both at home and abroad. War exacerbates world hunger.
Energy prices jumped 32% from levels removed a year ago. Prices at the gas pump have soared almost 50% from a year ago, but have started to slow. A record release of oil from the Strategic Petroleum Reserve and new lockdowns in China are driving prices down. The problem is that everything else is likely to continue to rise as supply chain disruptions worsen.
The core CPI (excluding food and energy) rose 0.3% from February in March and 6.5% from a year ago. This is the highest annual core inflation rate since mid-1982. The heart’s month-over-month increase marks a slight slowdown from the pace seen earlier in the year.
Gains spread from goods to services. Big-ticket items, including new vehicles, furniture and sporting goods, all continued to climb in price. Supply chain issues have reappeared, particularly in the vehicle sector. Disruption from truckers at the Canadian border, the closure of key factories in Ukraine, an earthquake that slowed computer chip production in Japan and a new round of lockdowns in China have all dampened production and capacity. to clear the arrears.
The one major exception was used vehicles, which fell in price but were still 35.3% higher than a year ago in March. The slowdown in used vehicle prices, which are still more than 50% above pre-crisis levels, is likely to be temporary given ongoing supply issues in the new vehicle market. Car dealerships and rental companies are always running out of inventory.
We were desperate to travel. TSA checkpoint throughput, walk-ins and OpenTable reservations and hotel occupancy increased. Airfares and rental cars were up more than 20% from a year ago, while hotel room rates were up more than 30% from a year ago.
Weddings, delayed by the pandemic, resume. Many resorts and popular places are already fully booked. Two of four restaurants at a popular destination I recently visited were closed due to a lack of staff; the other two were forced to cut services to deal with staffing issues. Some restaurants have closed parts of the dining room and reduced their hours to stay open despite staffing issues.
Pet services have also increased, as have financial service costs. Everything from veterinarians to daycare centers have been overwhelmed by the surge in pet adoptions that has occurred during the pandemic. Sadly, some are being sent back to shelters as they have proven families can no longer juggle getting kids back to school. Chequing accounts and financial services increase in price with interest rates.
Rising costs for financial services represent a further setback for low- and middle-income households, who tend to have lower balances in banks and are now drawing down rather than building up their savings accounts. Credit use soared in February as inflation increasingly became an issue for these households. Homebuyers rushed to lock in what they saw as the last of the ultra-low rates.
There was some moderation in ticket prices for sporting events and theaters. Medical costs have also been slow to rise following the outbreaks. This could change during the year. Many read this as a moderation in the pace of inflation – it’s too early to tell, given the earnings mix we’re seeing.
Last, but not least, rental and homeownership costs accelerated at the fastest pace since the early 2000s in March and are expected to get worse before they get better. It can take more than a year for a decline in apartment vacancy rates and an increase in home values to show up in CPI measures. This means that much of the surge we experienced in 2021 is still ahead of us.
Either the supply shocks subside, or the Federal Reserve could be forced to rein in and bring demand more into line with supply. The latter turned out to be the case. A half percent rate hike at the May meeting is a foregone conclusion. The Fed is also expected to announce reductions to its mammoth balance sheet in May and will likely increase another half percent in June. That would make the current credit crunch cycle even faster than what we saw in 1994, when the Fed pushed for a rate hike between meetings to calm what it feared was a surge in inflation.
Inflation is on the rise and is expected to remain too high through 2023. The Fed is behind the curve. Fed officials would like to bring rates back above the 2% level by the end of the year and 3% in early 2023. Balance sheet reductions should amplify rate hikes. Mortgage rates have already soared as the Fed threatened to withdraw its purchases of mortgage-backed securities. Regroup. A shiver is coming to the rate front.
Copyright © 2022 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources believed to be accurate, timely and reliable. However, no assurance is given in this regard. The reader should not rely on this information to make any economic, financial, investment or other decisions. This communication does not constitute an offer or solicitation, or a solicitation of an offer to buy or sell any securities, investments or other products. Likewise, this communication is intended to provide certain opinions on current market conditions, economic policy or trends and does not constitute a recommendation to engage or refrain from engaging in any particular course of action.