Inflationary pressures should ease after Q1, but won’t go away anytime soon

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The inflation rate is expected to peak in the first quarter due to the Omicron wave, then plateau at high levels, according to Conference Board economists. Overall, they expect core personal consumption spending and PCE inflation to remain above the Federal Reserve’s 2% target this year.

Further evidence of stubbornly high inflation came on Friday, when the Commerce Department said the PCE rose 5.8% year-on-year in December, the same level as November. The Core PCE, which excludes volatility in food and energy prices, jumped 5.9%, its highest rate since 1983.

While Conference Board economists expect inflation to ease a bit, they don’t expect prices to reverse. If anything, the rate of increase is likely to plateau later this year, especially once the data moves past the sharp price increases of a year ago. “The year-over-year base effects are going to disappear,” Dana Peterson, chief economist at the Conference Board, said during a press briefing.

This corresponds to consumer expectations. “We see inflation concerns easing among consumers, but remain elevated,” said Lynn Franco, director of economic indicators and surveys for the Conference Board.

Peterson distinguishes between temporary factors, such as factory closures and supply chain bottlenecks that fuel inflation, and more persistent factors, such as long-term trends in food shortages. workforce, de-globalization and the transition to renewable energy.

There are also factors that will offset some of the upward pressure on prices. That includes tighter monetary policy, retail competition, automation and efficiencies, and the proliferation of remote working, Peterson said.

Yet inflation is making consumers less confident, a factor that could cause people to cut back on their purchases. This, in itself, could reduce some strains on supply chains by lowering demand.

The University of Michigan consumer confidence index falls to its lowest level since November 2011, its main concerns being rising inflation and falling real incomes. said Surveys of Consumer Chief Economist Richard Curtin.

The Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker fell 4.4 points this week to 52.3, putting overall sentiment at levels last seen in February 2021 and with overall confidence currently 1.5 points lower. to the pandemic average.

Some 63% of consumers now feel less comfortable making a major purchase, such as a house or car, than they did six months ago, down 9 points from a year ago. two weeks, according to the survey.

Source: Forbes Advisor-Ipsos

We think inflation will be sticky but ease a bit from here, giving the Fed a path to balance growth while bringing inflation down to an acceptable level, said Matt Peron, chief financial officer. research at Janus Henderson Investors, after the publication of GDP for the fourth quarter of 2021 on Thursday. .

Inflation has certainly persisted longer than expected by the Federal Reserve – so much so that Chairman Jerome Powell retired the use of the word “transient” to describe the upward price trend. As a result, the central bank signaled on Wednesday that it is expected to raise its key rate soon.

With the Fed’s hawkish pivot, economists at BofA Securities now expect central bankers to raise rates by 25 basis points at every meeting for the rest of the year. That would represent seven hikes, bringing the target federal funds rate range to 1.75%-2.00% at year-end, which is still a very low interest rate.

Conference Board economists note that financial markets are forecasting about five 25 basis point rate hikes in 2022.

For businesses, “I think everyone sees inflationary pressure. There’s no two ways,” Apple (NASDAQ:AAPL) CEO Tim Cook said on CNBC earlier Thursday. But the tech giant’s revenue isn’t suffering. Its fiscal first-quarter earnings beat consensus and first-quarter revenue hit a record $123.9 billion, up 11% year-on-year.

In contrast, Caterpillar (NYSE: CAT), a maker of construction and other heavy equipment, said rising costs put pressure on its margins in the fourth quarter and will continue into the first quarter of 2022. Its shares fell 5.2% on Friday.

While banks typically benefit from higher interest rates in times of rising inflation, some financial companies are likely to lose business when the Fed turns to shrinking its balance sheet, said Dick Bove of Odeon Capital. He demoted Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) because the expected reduction in the money supply will “significantly” harm their activities in the capital markets.

SA contributor Jonathan Weber examines how inflation will affect the outlook for the S&P 500.

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