With significant Consumer Price Index (CPI) increases over the last year, many are wondering: "Are index increases transitory?"
Over the last 12 months, all items on the CPI increased 5.4% before seasonal adjustment; this was the most significant 12-month increase since the period ending August 2008.
In reality, everything is transitory because, at some point, it will end. So the question is the duration of time. I think it's fair to say this increase has lasted longer than what the Fed initially expected, but it doesn't seem that they're concerned.
For example, if we look at sales of used cars, you can see a 10.5% growth in June after a 7.3% and 10% growth before. And because the semi-conductor shortage curtailed the number of new cars being created, we see elevated prices in vehicles.
We haven't seen this type of inflation for quite some time, but if you look at PPG, a supplier of paints, they would say inflation has not been transitory. PPG Industries Inc. repeatedly raises prices of the paint and coatings it sells to customers across industries as inflation in raw material and logistics costs pressures the $40 billion business. Looking back over the past year, we have also seen several home price increases.
Home Price Increases
The annual percentage of home prices in 2020 had a 12-14.5% price change on homes. But then, the monetary policy showed the spike coincided perfectly with the Feds stepping into the market and buying $40 billion per month of mortgage-backed securities. And to top it off, the Feds are still doing it despite a 14% increase. Therefore, the housing market is robust with the question of, "Are we in a housing bubble?"
We hear a lot of noise about house prices, but the biggest driver of home prices ultimately is per capita income. The more money you have, the more house you can afford — and the more you're going to bid against other buyers. So, the significant long-term driver is the income you produce and the payments you can make to own a home. Just remember, if interest rates are low, the house's value can appreciate.
Small Businesses Planning to Hire
Are small businesses planning to hire? Can they hire enough workers? The NFIB is a small business association helping understand what is happening from an economic standpoint. William Dunkelberg, NFIB Chief Economist, stated, "in June, we saw a record-high percentage of owners raising compensation to help attract needed employees, and job creation plans also remain at record highs. Owners are doing everything they can to get back to full, productive staff."
If you look at the data above, we can see that more than 50% of small businesses have at least one unfilled opening at the moment, and 30% of the small companies are trying to hire. However, what stands out is we have more job openings and employees that quit relatively to unemployment. So for those who want a job, there are plenty out there.
Taper Tantrum
On May 22nd, 2013, Federal Reserve Chair Ben Bernanke announced that the Fed would reduce the volume of its bond purchases.
We saw interest rates rapidly increase from his announcement, causing the media to coin the term "Taper Tantrum." Unfortunately, because we had never seen this behavior before, there was no policy that we could look back at to see how the statistics would play out.
However, when the Fed began implementing the bond purchase strategy a few months later, you started to see yields decrease again. So the Feds are certainly keeping interest rates lower than they would have naturally, but we don't believe their suggestions are that far off the natural pace.
This first taper represented a slowing of asset purchases, and it was what we would consider a proper taper. However, the second taper tantrum we'll look at was much different. Under Federal Reserve Chair Janet Yellen, the Fed announced caps on the maximum number of Treasuries and Agency MBS allowed to roll off each month.
As a result, the Fed's balance sheet shrunk, but the Fed continued to buy large amounts of treasuries. By signaling a gradual plan, the rates did increase but over a more extended period. Eventually, the rates decreased as the market better understood the implications.
Consumer Price Index (CPI)
The graph you see above — called the Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) — measures the average monthly change in the price for goods and services paid by urban consumers between any two periods. We had a considerable CPI number of 5.4%, causing yields to come down slightly, eventually rising. But then, July 13th was a growth day where we should have seen a value rotation. Also, the dollar increased relative to other currencies.
Overall, these statistics have been unusual. There has to be more to all of this than interest rates increasing. As the story unfolds, tune in to GWS' YouTube Live every Wednesday at 3:30 p.m. CT for our take on what's happening in the market.
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Disclosures:
Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance references are historical and are no guarantee of future results. In addition, all indices are unmanaged and may not be invested directly.
Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.