The annual inflation rate in the US accelerated to 7.5% in January, the highest level since February of 1982 and well above market forecasts for 7.3%. After the inflation results were released the stock market fell, concerned that higher inflation will require the Federal Reserve to raise rates more quickly, slowing the economy. Inflation continues to be one of the biggest concerns for investors, and accurately forecasting the path of inflation will be critical in 2022. Here are some of the details of what is driving the inflation numbers.
The 7.5% inflation figure was driven by soaring energy costs, labor shortages, and supply disruptions. Indeed, soaring energy costs were the biggest contributing factor, rising 27% year over year, while gasoline prices surged 40%. Falling US oil production, driven by eco-friendly policies, and rising geopolitical risks, primarily in Russia and Ukraine, were key factors in the rise.
Inflation also accelerated for shelter 4.4% as soaring property values filtered down to rent increases, a trend that is likely to continue in the coming months. Inflation for food at home rose 7.4%. New vehicles rose 12.2% and used cars and trucks rose an unbelievable 40.5% as supply disruptions for new vehicles drove consumers to seek alternatives in the used car market.
These details will matter as we (and the Federal Reserve) forecast the path of inflation. For example, supply chain issues may quickly resolve, slowing inflation in Vehicles. The global computer chip shortage has been a big problem for auto manufacturers, and that issue is showing signs of resolution as chips arrive and auto production ramps up. Conversely, there is no short-term fix for the ‘shelter’ component of inflation and rents may continue higher for some time.
Energy is a wildcard and difficult to forecast. Historically, energy has been one of the most volatile components of the inflation calculation. A resolution of the global tensions with Russia at the Ukrainian border could help alleviate some price pressure, but the longer-term trend away from oil production, particularly for the US, could result in continued energy inflation.
As investors the January inflation numbers are concerning. Persistent inflation should not be bearish for stocks unless and until the Fed is forced to raise rates to levels that cause a recession. The future path of inflation and the Federal Reserve’s response will be critical.