This Week’s Economic Update, January 17, 2022

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Supply chain issues continue to exist worldwide.  Norway, appears to have the most egregious supply chain shortage that I have seen so far.  As background, Norway requires all citizens that have reached the age of 17 to serve up to 19 months in the military.  At induction, the citizens are provided with all their supply needs, including clothing.  Beginning last week, Norway began requiring all conscripts that have completed their service obligation to return certain items to be reused by the incoming recruits.   The items required to be returned were……underwear.  Now that is quite a supply chain shortage.  Let us hope the US does not see a run-on supplies of underwear.

Late in the week President Biden nominated three regional chairs to the Federal Reserve.  The three are Sarah Bloom Raskin, Lisa Cook and Philip Jefferson.  Sarah Bloom Raskin will serve as the Vice Chair for Supervision of Banks.  This important role will oversee the bank supervisory and regulatory authority.  If approved. she will have influence on the interpretation of the rules set forth for compliance.  In the past Ms Bloom Raskin has been extremely vocal in arguing that bank regulators should consider the financial risks posed by climate change.  If confirmed, banks are likely to see more scrutiny on lending to specific industries. 

The CPI report this past week does require a bit of interpretation.  While the year over year inflation rate was shown at 7%, it should be noted that the monthly increase was .5% in December.  It appears that the highest bumps in prices occurred from March through June and again in October and November of 2021.  Could we hope to have passed the worse of the inflation jumps?  We thought that from July to September this past year when the monthly numbers dipped before surging in the Fall. 

The producer price index for the year typically is a leading indicator of what the CPI will do.  The core PPI released on Thursday showed a .5% increase.  This was a step down from November.  Year over year the core PPI is at 8.34%.  Again, the numbers in April, July and November were peak points.  If the core PPI continues to moderate, we might be past the worst?  As I have said before, one month does not a trend make.

While the labor market continues to be hot with many workers chaining jobs to get a bump in pay, employers are also providing raises for existing employees to keep them.  When you compare the inflation rate to the wage increases, we are seeing numbers that are troubling.  Wage increases in 2021 have lagged inflation by 2.6%.  So, in real terms, workers are worse off than they were in 2020 in terms of buying power.  This has somewhat been overshadowed by the liquidity provided by various government programs in terms of stimulus.  Consumers continue to see their bank balances as sufficient to continue to spend, in spite of the inflation they are seeing.  Make no mistake, the consumers are concerned about inflation, but up to now, are not abating in spending.  The key number to watch for coming up is total bank deposits.  Right now, we have the number for third quarter 2021 which was 19.1 trillion, up from 18.7 trillion at the end of the second quarter.  Seeing a drop in deposits could be a sign that the liquidity is running out and demand, in certain areas, may begin to abate which could leave inventories to rise and prices to at least plateau.

The retail sales numbers for December did show a drop month over month from November to December.  This drop should be kept in context.  Consumers were impacted by personal experience as well as the media discussing the supply shortages, especially in light of Christmas.  October and November consumer spending was at a strong pace, essentially pulling the purchases forward.  This left December to be a down month as most exhausted the spending early.  January numbers are likely to be better, unless the existing empty shelves curtail the spending.

Sadly, oil prices continue to rise as supply levels struggle.  Cold weather and increased travel is absorbing the current production levels.  In spite of US Oil rigs bumping just over 600, the production level as well as the refining capacity, is just not keeping up.  We can expect higher gas and fuel oil prices to continue until the second quarter.

Have a great week.  Keep track of your underwear.

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