Not to sound like a broken record over the past several weeks, but it’s hard to avoid the elephant in the room: inflation. Indeed, once again the prices consumers pay dominated the narrative through the week after October’s CPI read was hotter than expected (more on that below). From national to local news, everyone seems to be finding an angle to report on prices and how they’re impacting business owners and holiday shoppers. With so much focus on a singular topic, it’s hard not to be a bit concerned. But here’s what we recommend — and have recommended — for some time: Be patient, and stick to your financial plan. That’s it. Keep it simple.

Now, let’s dig a little deeper into the headlines from last week and get you ready for the week ahead.

Wall Street Wrap

Inflation Narrative Expands With October Print: The U.S. Consumer Price Index rose 0.9 percent in October following a 0.4 percent month-over-month rise in September. Year-over-year inflation reached 6.2 percent. That read was higher than expectations and quickly became the focus of market commentators through the week, especially given inflation hasn’t been this high since the 1990s.

We believe a main driver of inflationary pressures is a sharp, though temporal, acceleration in spending from services to goods coming out of a pandemic-driven trough. Goods need to be manufactured and shipped, and a wave of demand has put pressure on supply chains and pushed headline inflation higher.

After a two-decade deflationary spiral, durable goods prices rose 13.2 percent year over year. Non-durable goods prices rose 9.4 percent after inflation remained negligible from 2012 to 2019. Together, these two categories account for 40 percent of CPI. However, durable and non-durable goods prices are bound to fall back toward a longer-term trend in the intermediate term. Just think: How many new couches, washing machines or vehicles does a typical consumer purchase each year? A quality washing machine can last a decade or more, for example. This wave of demand is bound to dissipate, and demand will normalize and ultimately ease some inflationary pressures we’re seeing.

Pressure on the Fed? Although some may argue another hot inflation read puts pressure on the Fed to act sooner than later, the central bank likely won’t be using its policy hammer to fight it any time soon. For one, the Fed is prioritizing the employment component of its dual mandate (keeping inflation in check is the other component) and will allow inflation to run higher. The Fed hasn’t reached its full employment mandate, and raising rates too soon could jeopardize the economy’s path toward it. Secondly, Fed Chair Jerome Powell, in his latest policy presser, said the central bank simply lacks policy tools that can fix the supply chain disruptions at the heart of rising prices. In other words, this bout with rising prices is a product of pandemic-driven disruptions and not traditional economic forces.

It’s funny; not long –ago, fears of a deflationary cycle permeated markets. Now, just six months into an inflationary spike, there’s hand-wringing that this is all permanent — you’ll sprain your neck trying to keep pace with the shifts in sentiment. While data indicate inflation may stick around longer than originally forecast, that doesn’t mean it’s permanent. The economic fundamentals simply don’t support inflation running well above the Fed’s target of 2 percent.

Consumer Sentiment Sours, but Add a Grain of Salt: Consumer sentiment has fallen to its lowest level in a decade, according to the University of Michigan’s monthly survey. By the numbers, sentiment in November hit 66.8, down from 71.7 in October. The survey notes that one in four consumers say inflation has reduced their standard of living and income, with older consumers voicing the greatest impact. There’s a lot of pessimism, but it seems to run counter to on-the-ground conditions and consumer behavior.

Jobs are plentiful, and employers are sweetening incentives to attract talent. The markets continue to march higher. Consumer balance sheets haven’t been this strong in quite some time. Adobe is forecasting record online holiday spending; Visa’s U.S. spending index is strengthening. The impact from COVID-19 is fading, with new treatments on the way. In Washington, D.C., lawmakers passed an infrastructure spending bill — and while the Build Back Better plan remains in limbo, it looks like the final price tag could be half what was originally proposed.

Sentiment surveys are heavily spiced with partisanship. When a Democrat is president, Republicans view the economic outlook negatively, and vice versa — regardless of economic conditions. In fact, the November sentiment report dedicates an entire paragraph to this political divide. Even so, consumers aren’t long-term pessimists about prices. The survey showed consumers’ one-year inflation expectations remained elevated at 4.9 percent, which is the highest since 2008, but intermediate- to longer-term expectations stayed steady at 2.9 percent (the market also is pricing in lower inflation long term).

Small Business Owners Not Enthusiastic Either: The NFIB Small Business Index fell to 98.2 in October, its lowest level since November 2012. Among notable takeaways, 44 percent of business owners reported they had raised compensation, which is a 48-year high reading for the index. A net 32 percent said they planned to do the same in the next three months. However, to support those wages, business owners plan to raise prices — the percentage who plan to boost prices is at an all-time high for the index. On the brighter side, fewer business owners said they couldn’t fill job positions, falling from 51 percent to 49 percent. Lastly, 58 percent said there were few or no qualified applicants for job openings, which is still high but down 4 percent from the previous month’s record 58 percent. Now it’s still early, but these could be signals a tight labor market is beginning to loosen a bit.

The Week Ahead

The Bottom Line From Retailers: Retail earnings from the likes of Walmart, Home Depot, Target and more are coming up this week, and that’ll certainly prove informative about consumers and supply chains. Of course, the supply chain leverage enjoyed by the likes of Walmart isn’t enjoyed by a small business owner, but we’ll be keenly interested in how these retailers are navigating logjams and rising transport and materials costs. Their forward-looking commentary will also be important, as these companies have the best read on consumer behavior. Look for deeper analysis on retail earnings from us next week.

The Rest of the Week: Here’s what we’re watching the rest of the week.

  • Tuesday: Retail sales from October will be released as the market opens. Every year, these numbers take on added significance, as this is prime time for this sector. We’ll be interested to see if consumers are just as pessimistic with their wallets as they are with their economic outlooks. We’ll also study capacity utilization and industrial production for early signs that inflationary pressures might be easing. Lastly, the NAHB home builders’ index for November will be released.
  • Wednesday: More housing data — building permits and housing starts.
  • Thursday: Initial jobless claims and continuing jobless claims provide a weekly checkup on labor market health. We think this will continue gaining momentum. Lastly, leading economic indicators for October will be released (one of the top metrics we watch).

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