- Jan. 18, 2022
-- The bumpy ride for financial markets in the early days of 2022 continued last week, with inflation remaining front and center. A multidecade jump in consumer prices was a reminder that inflation is a key driver and risk for the year ahead, impacting Federal Reserve (Fed) policy, consumer spending, bond yields and sector leadership. With prices high, yields rising, and valuation concerns, we examine what's expected and likely priced in by the markets, along with implications for portfolio positioning.Price pressures continue to build but are possibly peaking in the coming months
Source: 1. FactSet
- All eyes were justifiably on inflation last week, with the released data revealing the fastest price increases in decades. The consumer price index (CPI) rose 7% in December from a year ago, the fastest pace since 1982 and the eighth straight month in which inflation exceeded 5%. Excluding the volatile categories of food and energy, inflation rose 5.5%, the most since 19911.
- Like last year, goods inflation played a large part in the jump in prices. For example, prices of used cars and trucks soared 37%, and furniture prices rose 14% from a year ago. While pandemic-related supply-and-demand imbalances continue to drive prices for durable goods higher, services inflation is also strengthening but to a lesser extent, rising 3.7% in December1.
- As supply chains normalize, energy prices level off, and year-ago comparisons become tougher, we expect inflation pressures to peak in the coming months and start moderating more meaningfully in the second half of the year. However, uncertainty around the timing is high because the omicron variant is worsening the labor and material shortages, at least temporarily. Even with prices for goods likely cooling off once bottlenecks begin to ease, services inflation is likely to stay strong, supported by home-price and rent increases and rising wages, which is why we expect overall inflation to stay above the Fed's 2% target through 2022.
- What's priced in? While eye-popping, the December consumer price gains were no worse than feared and, likely because of that, stocks rose and bond yields fell the day of the release. After having surprised to the upside for most of the past year, the CPI has now been in line with consensus expectations for two months in a row. There are certainly upside inflation risks, but because investors have already recalibrated their expectations higher, we think that markets can stay resilient in the face of high prices in the near term.