Pollack: Inflation Will Be With Us For Awhile

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co. | Rose Law Group Reporter

Shocking data from Labor Department was released last week as the CPI index again increased to levels not seen since December 1981. Many observers anticipated that inflation likely peaked in April at 8.3%. Instead, May’s increase of 8.6% was driven by large increases in the prices of energy and groceries. Gas prices are on the verge of surpassing a national average of $5 per gallon. Energy prices jumped 34.6% last month compared to May 2021. Food prices jumped 10.1% over the same period. On a slightly brighter note, core-inflation (removes energy and food) was up 6.0%, down from 6.2% in April. The unexpected increase of inflation will draw the attention of the Fed.

Investors expect the Federal Open Market Committee to continue its aggressive approach to monetary policy tightening at the upcoming meeting on June 14 and 15. The Federal Reserve will likely deliver its second consecutive 50 basis point (bps) interest rate hike and continue to roll off assets from its nearly $9 trillion balance sheet. The last time the Fed made two 50 bps interest rate hikes (non-consecutive) was in mid-1994.

The Fed has been walking a tightrope in recent months, attempting to bring down inflation levels from multi-decade highs without plunging the U.S. economy into a recession. The S&P 500 is down 13.6% year to date on growing concerns that the Fed will not achieve a “soft landing” for the economy.

While the Fed has some tools in its toolbox to fight inflation, external factors are still weighing on its efforts – the most prominent of which is the war in Ukraine. Energy is the primary element that reverberates throughout the economy, affecting transportation costs across most industries including food. Rising mortgage rates, impacted by the Fed’s actions, have started to affect the housing market particularly refinancing activity. Additional increases in the federal funds rate will likely have a further impact.

U.S. Snapshot:

  • The Blue Chip Economic Indicators panel lowered their GDP Growth forecast for both 2022 and 2023 to 2.5% and 1.9%, respectively. Inflation is expected to remain high in 2022 and lower in 2023. While a slowdown in inflation is expected by the panel in 2023, it remains above the Fed’s 2.0% target.
  • Consumer credit increased $38 billion as revolving credit (credit cards) added $17.8 billion and non-revolving credit grew by $20.3.
  • June’s preliminary Consumer Sentiment level dropped 14% from May to 50.2 reaching its lowest recorded value. The majority of the decline was attributed to increase of gas prices.

Arizona Snapshot:

  • Arizona total taxable sales continued to grow, albeit at a slower rate than March. April’s total sales were up 13.4% from a year ago, down from March’s 14.2%. Retail sales were up 11.4% in April, up from 10.6% rate. Maricopa County’s retail sales outpaced the state with an increase of 12.7% in April.
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June 2022