One of the privileges of my calling is that I get to travel around the country and speak to a range of people—from capital markets professionals to ordinary consumers—about the U.S. economy.
No issue these days animates them more than the notion of affordability.
There are those who dismiss the idea that consumers are facing an affordability crisis as a creation of the media. In these discussions, data gets politicized and outright false information enters the debate. The result is that it can be hard to have a rational conversation based on an agreed-upon set of facts.
But there is no such confusion among the regular consumers I talk to. They have been telling me a clear story, that their day-to-day cost of living is surging, including just keeping the lights on.
In December, electricity prices increased by 6.7% from a year ago compared to the overall price increase of 2.7% inside the consumer price index. Food and housing costs also outpaced the overall rate of inflation in December.
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Which brings us to the January consumer price index to be published on Friday.
For us, the big takeaway from the CPI report will be how many businesses used the turn of the year to raise prices, as they often do, and how many firms decided to pass along tariff costs that they have been absorbing.
These factors will most likely help push up the top-line CPI figure for December.
But deeper in the data, there will be a focus on the day-to-day cost of living, including rent of shelter, which increased by 3.1% annually in December, and food and beverage, which rose by 3.0% on an annual basis in December.
Both categories, which are central to consumers’ concerns about affordability, have moderated recently but remain above the Fed’s 2% target, with rents having a 35% weight in CPI calculations and food with a 14.5% weight.
Rent increases, exacerbated by the housing shortage, have overshadowed all other household expenses over time, specifically because of the changes in housing preferences during the pandemic and the acceleration in rents.
We expect top-line inflation on a year-ago basis to slowly climb back to 3% by April with risk of a stronger move higher because of traditional turn-of-the-year price increases.
The higher inflation will also show up in the personal consumption expenditures index, which the Federal Reserve uses to make policy. We expect the PCE index to reach 3% or above in the near term with the core PCE index—which excludes the more volatile food and energy categories and is the best long-term predictor of inflation—moving to 3.1% or higher.
None of the pricing data bodes well for any near-term rate cut by the Federal Reserve at its March meeting or later this summer, when presumably a new Fed chair will take the helm of the central bank under pressure from the White House to cut rates.
