October 15, 2021Financial literacy Economy News Trending Weekly update Weekly commentary
What's Happening Today - Oct. 12
I hope everyone had a lovely Thanksgiving weekend. Onwards to Halloween, and then before you know it, it’s Christmas time. Apparently, due to the supply chain issues, Christmas shopping season has already begun, as shoppers are concerned about the availability of product to put under the tree. I’ve noticed my favorite rum has been in short supply lately, so shop early and shop often! But I digress; so let’s see what’s happening out in the world this week.
The word of the week appears to be inflation. The 1.2% climb in food prices at home contributed roughly a tick to the monthly advance in total prices, and reflected broad-based increases in products from meat to dairy to bakery products and beverages. The increase coincides with a slowdown in restaurant traffic which boosted demand for grocery stores in August, something that looks to have extended into September, but won't have staying power once Delta cases meaningfully subside. A jump in energy prices also contributed to the headline gain, and gasoline prices have climbed further in October reflecting supply constraints in the oil market and OPEC's decision eschew a further production hike for now. While we look for a cooling in crude prices next year on OPEC production increases, in the near term, we will see these fuel hikes priced into other goods where transportation costs are an important factor. Core categories were mixed as strong demand amidst supply chain issues in the new vehicles market combined with higher shelter prices to offset drops in Delta-impacted services like airfares and hotels, while used car prices also eased off but remain elevated. There is clearly scope for further drops in used car prices as supply chain pressures ease in the new vehicle market next year, given that they are still up 24% y/y. The increase in shelter prices left the annual rate of inflation in that component at 3.2%, below the pre-pandemic trend of 3.35%. The divergence in that CPI component with the underlying housing market during the pandemic, in which home prices have risen steadily since mid-2020, can be explained partly by the weakness in urban rental markets that experienced an exodus of people at the onset of the pandemic. Indeed, the shelter component is running at a 2.3% annualized pace since pre-pandemic levels and still has lost ground to make up.
Inflation continued at a lofty rate in the US in September as higher energy and food prices combined with core categories to offset some weakness in Delta-impacted service prices. That caused total inflation to accelerate to 5.4%, and left core inflation at an elevated 4.0%. Given the persistence of supply chain issues in some industries and the pass through of higher energy costs into goods prices, inflation seems likely to remain elevated for longer than previously expected. While the supply-side drivers will abate as the pandemic eases in 2022, it won't be long into the year before more sustained price pressures emerge as the economy moves towards full employment. The Fed needs to get on the job of tapering now, to have it completed early enough to raise rates to lean against those cyclical inflationary pressures, and we continue to expect the first rate hike from the Fed to occur in September 2022.
Across the pond, data showed U.K. GDP was 6.9% higher in August than the same period last year, slightly higher than 6.7% expected. At some point today, the EU will release its proposals to address British concerns with respect to the Northern Ireland protocol (likely to scrap checks on food products crossing the Irish Sea). Of course, the UK government won’t be satisfied as it basically wants no checks on any goods crossing the Irish sea plus a removal of the ECJ’s oversight of the protocol. So we’re headed nowhere.
Asian markets ended mixed as China outperformed while Japan finished slightly lower with exporters notably weak and Hong Kong closed on a typhoon warning. Positive trade figures from China, showed export growth unexpectedly accelerated, but import growth disappointed, in September.
As always, give us a shout if you have questions, or if you’d like to chat.