We want to wrap up 2021 economic commentary with a quick summary of last week’s Jobs Report and this week’s Consumer Price Index.  Certainly, there are many commentators doing the same thing right now, so ours will be a Quick & Dirty (Q&D) version.  Probably not well organized either.

CPI:  The CPI was up .5% in December and was up 7.0% year-over-year (y/y).  The major components pitching in to that number most are:

Energy: Even with a slight decline in December, the energy sec was up 29.3% y/y, but the one we care about-gas was up y/y 49.6%!

Shelter:  Shelter costs represent about one third of the CPI and the .4% increase in December continues the recent acceleration in the cost of a roof over our heads.  Y/Y, shelter rose 4.1%

Used Vehicles:  Up 3.5% in December for a y/y total of 37.3%!  Here, the cause is well documented- supply side constraints that have torpedoed new vehicle production.  Add that to the gas increase, and buyers are really feeling the pinch!

If you’re settled into your digs, already owned a car pre-Covid and live close to work or are doing remote, you weren’t really affected by these major cost pushes.

Jobs:  Our economy is in what until now seemed a mythical scenario academics used to describe full employment- “If you want a job, you can find a job”.  Full employment is great, but in every market the forces of supply & demand (S&D) determine price.  With roughly 10 million jobs available for the 6.4 unemployed, we are seeing an extraordinary acceleration in the cost of labor.  I discussed this in my Monday post this week.  The key take away for this year in this scenario is that workers are involved in every stage of production.  If wages become a major cost driver at all those stages, we see inflation ‘baked’ into the economy, negating the great increases workers currently enjoying.

Now the Fed is targeting a fairly aggressive clamp down on the money machine that makes this all work.  They, shortly, will stop buying securities (read: creating reserves and thus money), raise rates for the first time in years and have planned maybe three or four rate increases the year.  Suffice it to say that’s a lot clamping!  

So if there’s a six-month lag before Fed actions are baked into the economy, and by June ’22 they may have fired three rounds at the problem without data on where the first shot hit and what affect it’s having on the economy.  History says they will overkill the problem before they realize it.  That’s a recession.