Monday Morning Quarterback (02/15/2021)

February 15, 2021

CPI Inflation & Outlook

On Wednesday, the U.S. Department of Labor reported that both the headline Consumer Price Index (CPI) and Core CPI, which excludes volatile food and energy costs, rose by 1.4% over the last 12 months – well below the Fed’s target of 2%. In January, the indices reflected weak price inflation for pre-owned and new automobiles, recreation, and airline fares, while shelter, medical care, auto insurance, and apparel showed the most substantial price growth. Despite weakness in inflation last month, fixed income asset yields remained near a one-year high, signaling a rise in inflation. The most significant driving forces behind inflation are economic slack (measured by the output gap, the difference between actual GDP and its potential) and inflation expectations. According to ING’s Chief International Economist James Knightly, “inflation is undoubtedly going to move higher in the months ahead. The key questions are how high and how long will it last?”

Eye on CPI

When the U.S. money supply skyrocketed in early 2020, some investors feared that inflation would run rampant. However, the relationship between economic growth, inflation, and monetary aggregates (i.e. M1 and M2 money supply) broke down in the late 1980s. Now, growth in the money supply hardly factors into the setting of monetary policy. The explosion of liquidity during the pandemic has helped aid economic growth, relieve financial strains, and boost asset prices. But has yet to raise CPI. Despite the absence of a mathematical formula, the efficacy of the Fed’s new monetary framework will be tested in the near future. While the Fed’s long-term 2% goal for inflation (as measured by the Personal Consumption Expenditures (PCE) Price Index) has not changed, its process for getting there has. After over a decade of sub-2% inflation, the central bank will aim to keep inflation moderately above 2% for some time. According to the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters, over the next decade CPI inflation will average 2.2% annually, while PCE inflation averages 2.0%.

Consumer Sentiment Index

On Friday, to the surprise of many economists, the University of Michigan reported that its consumer sentiment index dropped in early February reflecting that Americans remain concerned about the economy. Despite the expected passage of up to $1.9 trillion in fiscal stimulus, “consumers […] viewed prospects for the national economy less favorably in early February than last month,” the University said in a statement. Economists surveyed by Reuters projected that the index would increase slightly from January’s final reading of 79.0 to 80.8 earlier this month. However, instead of 1.8 in growth, consumer sentiment fell by 2.8 earlier this month to 76.2.

This Week’s Economic Reporting

The US Census Bureau will release January’s retail sales report on Wednesday, February 17th. SkyView Advisors expects to see seasonal adjustment noise in the January economic reports. Additionally, the Fed will release the FOMC minutes later the same day.

200 Million More Vaccine Doses

On Thursday, President Biden announced that the federal government signed contracts with Moderna and Pfizer that required each firm to produce an additional 100 million COVID vaccine shots. To date, the U.S. Government has purchased 600 million doses. This supply increase will put the country on track to achieve Biden’s goal to inoculate 300 million Americans, twice, by the end of July. However, local and state officials are struggling to meet the demand. To meet these needs, the Biden administration increased the number of doses for each state, territory, and tribe to 11 million per week, a 28% increase since Biden took office.

COVID Cases & Deaths

Last week, U.S. coronavirus cases and casualties fell on a week-over-week basis for the second consecutive time. On February 12, the seven-day moving average for new cases fell below 100,000 for the first time since November 4. Only 26 days ago, the weekly rolling average was above 200,000. As expected, growth in the pandemic death toll has decelerated at a much slower pace than cases. However, Biden’s initiate to vaccinate 300 million Americans in less than six months offers hope that soon the rate of new deaths will fall as quickly as cases have.

Chart of New Coronavirus Cases Reported per Day

Chart of New Reported Coronavirus Deaths per Day