The Fed has always said they will be data driven. If they needed more ammunition before they decide to raise interest rates for the first time since December 2018, they got it this week. Yesterday, the headline consumer price index increased 7.5% compared with a year ago. Core CPI, which strips out volatile food and energy costs, increased 6%, compared with the estimate of 5.9%. Core inflation rose at its fastest level since August 1982. The monthly CPI rates also came in higher than expected with headline and core CPI both rising 0.6%, compared with estimates for a 0.4% increase by both measurements.
What items are driving up the CPI? That’s a great question… I’m glad you asked! Fuel oil rose 9.5% month over month as part of a 46.5% year over year increase. Energy costs overall were up 0.9% for the month and 27% on the year. Vehicle costs, which have been a big inflation contribution since the spring of 2021, were flat for new cars and up 1.5% for used cars and trucks in January. The lack of new car inventory due to a microchip shorter is generally to blame for the higher auto prices. Shelter costs, which make up one-third of the total CPI number, increased 0.3% on the month, which is the smallest gain since August 2021, but still up 4.4% over the past year.
Okay… that was a lot of number and percentages. Let’s talk about the Fed. Most are no longer debating when the Fed will raise rates, but rather by how much at the upcoming March meeting. The Fed hasn’t increased interest rates by 50bps in one meeting since 2000. In the last two weeks, some Fed officials have tried to play down expectations of a 50bp move. This week, Cleveland Fed President Loretta Mester laid out a plan where the Fed starts with quarter-point rate hikes, with more aggressive moves on the table in the second half of the year if the high inflation readings remain. Inflation is a function of supply and demand. It is hard to envision how Fed rate hikes will magically heal or improve the damaged supply chains, but the Feds rates hikes should have some impact on demand at some point in the future to cool off inflation. Stay tuned as the Fed will meet next month starting on March 15th and concluding the following day.
Next week’s economic calendar includes some key retail sales data as well as industrial production and capacity utilization. Additionally, some housing related data will come by the way of new housing starts and existing home sales.
Lastly, I’ll leave everyone with some fun Super Bowl facts in time for Super Bowl Sunday. $6,214: The average cost of a ticket to the past five Super Bowls. $6.5 million: The cost of a 30-second Super Bowl ad this year. It will be the 2nd time a team will play the Super Bowl in their home stadium. The last time this happened? Just last year with the Tampa Bay Buccaneers! Enjoy the game and have a great weekend!
Consumer Price Index, Percent Change from a Year Ago (1980 to Present)
The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.
Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizes software and products developed by Baker’s Software Solutions* combined with the firm’s investment experience and advice.
*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.
INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.