{"id":13017,"date":"2024-02-26T18:16:53","date_gmt":"2024-02-26T18:16:53","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=13017"},"modified":"2024-02-26T18:17:06","modified_gmt":"2024-02-26T18:17:06","slug":"inflation-in-january-a-closer-look-at-its-impact-and-implications","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/inflation-in-january-a-closer-look-at-its-impact-and-implications\/","title":{"rendered":"Inflation In January: A Closer Look At Its Impact And Implications"},"content":{"rendered":"\n

Why You Shouldn\u2019t Worry About January Inflation Data<\/strong><\/p>\n\n\n\n

On February 13th, the U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) measure of inflation rose 0.3% month-over-month in January, and 3.1% year-over-year. This inflation print was materially higher than consensus estimates for a 2.9% increase.<\/p>\n\n\n\n

The news sent equity markets into a volatile session. The S&P closed down more than -1%, and the Russell 2000 index of small-cap stocks\u2014which tends to be growth and interest rate sensitive\u2014sank by approximately -4%. Meanwhile, yields on 10-year U.S. Treasuries jumped.1<\/sup><\/p>\n\n\n\n

In short, it was not the news investors wanted to hear. But I wasn\u2019t worried.<\/p>\n\n\n\n

For one, I am not convinced that the bull market is driven solely by expectations for rate cuts, as many pundits suggest. U.S. stocks started rallying in October 2022, which was a time when the Fed was still raising rates aggressively and no one was forecasting cuts. But I\u2019ve also argued that stocks were rallying ahead of better-than-expected economic growth in 2023, and also in anticipation of an earnings rebound I think started in Q3 2023. January\u2019s inflation data, and shifting expectations for rate cuts in 2024, did not change those fundamentals.<\/p>\n\n\n\n

Navigate Inflation with Our February Stock Market Insights<\/a><\/span><\/strong><\/p>\n\n\n\n

January\u2019s inflation data caught many by surprise\u2014including the stock market. But instead of \u2018reacting\u2019 and making knee-jerk portfolio decisions, investors should take a more balanced approach. Our February Stock Market Outlook shows you how.<\/p>\n\n\n\n

To learn about strategies for keeping a steady hand amidst noisy data and frequent bouts of market volatility, I\u2019m offering our February 2024 Stock Market Outlook<\/a><\/span><\/strong>, which emphasizes the significance of diversifying investments and provides detailed insights, such as:<\/p>\n\n\n\n

\u2022 The Importance of Asset Allocation
\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want ideas on how to invest in a strong market, click on the link below to get your free report today!<\/p>\n\n\n\n

IT\u2019S FREE. Download the February 2024 Stock Market Outlook2<\/sup><\/a><\/span><\/strong><\/p>\n\n\n\n

The second reason not to worry about January CPI was the outsized role played by \u201cshelter costs.\u201d Shelter costs refer to the cost of housing. Its relative importance in CPI inflation data is huge \u2013 making up some 36% of the entire calculation. One subcategory of shelter costs, called owner\u2019s equivalent rent (OER), is responsible for about 25% of CPI.<\/p>\n\n\n\n

In the January data, shelter costs increased by +0.6% month-over-month, which marked an acceleration from December\u2019s +0.4% month-over-month increase. Because of its relative importance, this single data point can pull CPI significantly higher for the month.<\/p>\n\n\n\n

The question, though, is whether the shelter cost calculation \u2013 and in particular OER \u2013 is truly reflective of residential housing costs across the country today. I would argue it isn\u2019t.<\/p>\n\n\n\n

In order to calculate OER, the Bureau of Labor Statistics\u2019 Consumer Expenditure Survey asks participating Americans the following question: \u201cIf someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?<\/em>\u201d While I understand some homeowners do rent their houses out for extra cash, it is also fair to label this question \u2013 and the data it produces \u2013 as purely hypothetical. It\u2019s a made-up number, but it also has a disproportionately large impact on the CPI calculation.<\/p>\n\n\n\n

In my view, the calculation is problematic. Asking homeowners how much they would rent their house for is a strange way to determine housing costs. But we also know from analyzing the data that OER lags actual housing prices by over a year. Even as housing prices began to decline year-over-year in April 2022 (red line in the chart below), OER continued to move higher for about 15 months (blue line in the chart below). If this relationship holds\u2014which I firmly believe it will\u2014we can expect shelter costs to fall by about half over the next nine months, which should have an anchoring effect on the CPI calculation.<\/p>\n\n\n\n

Shelter Costs (OER) Lag Housing Prices by Over a Year<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

The chart below shows the clear effect that high shelter costs are having on the CPI figure. The purple line shows shelter costs while the red line shows headline CPI. Again, with shelter costs making up some 36% of the CPI calculation, it\u2019s clear that elevated readings\u2014which we\u2019ve established are lagging and not necessarily reflective of housing prices across the country\u2014are pulling the CPI number higher. If it weren\u2019t for shelter costs, CPI (ex-shelter) in January would have been 1.6% year-over-year.<\/p>\n\n\n\n

CPI (All Items, Red Line) vs. Shelter Costs (Purple Line)<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Bureau of Labor Statistics4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Knowing what we know about housing prices and the OER calculation, we can reasonably predict that January\u2019s 6.2% OER print will fall to under 3% by this fall. With other elements of the inflation data still trending in the right direction\u2014goods inflation, for example, continues to be negative\u2014I think worries about Fed cuts and price pressures will all but fade completely within a few months.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

As I stated early in this week\u2019s column, the overall outlook for the U.S. economy\u2014whether you look at jobs, consumer spending, corporate earnings, services activity, wages, etc.\u2014continues to be fundamentally positive, even with one month\u2019s higher-than-expected inflation print. Even still, the CPI number may not matter as much as investors think it does. The Federal Reserve\u2019s preferred inflation gauge, the headline personal consumption expenditures (PCE) price index, puts a smaller weight on housing costs than CPI.<\/p>\n\n\n\n

To better prepare your portfolio for inflation and other market shifting factors, I recommend downloading our February 2024 Stock Market Outlook Report5<\/sup><\/a><\/span><\/strong>, which contains some of our key forecasts to consider, such as:<\/p>\n\n\n\n

\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 Buy-side and sell-side consensus at a glance
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about our market forecasts for 2024, click on the link below to get your free report today!<\/p>\n","protected":false},"excerpt":{"rendered":"

January’s inflation numbers were higher than expected, and sent stocks down. But in context of the overall economy, it’s not a big issue. <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-13017","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13017","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=13017"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13017\/revisions"}],"predecessor-version":[{"id":13021,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13017\/revisions\/13021"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=13017"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=13017"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=13017"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}