by Louis Navellier

January 19, 2022

The big news last week was that inflation is now running at the highest pace in almost 40 years after the Labor Department announced on Wednesday that the Consumer Price Index (CPI) rose 0.5% (a 6% annual rate) in December. The core CPI, excluding food and energy, rose 0.6% (over 7% annually). In the past 12 months, the CPI and core CPI are running at an annual pace of 7.0% and 6.8%, respectively.

Food prices rose 0.5% in December, while energy prices declined 0.4%. Used vehicle prices rose 3.5% in December and have surged 37.3% in the past 12 months, due to the ongoing semiconductor chip shortage curtailing the production of new vehicles. Since auto manufacturers are making more expensive (and profitable) vehicles, new car prices rose 1% in December and 11.8% over the past 12 months.

If you thought the CPI was bad, the Producer Price Index (PPI) was worse. On Thursday, the Labor Department reported that the PPI increased only 0.2% in December, but on a trailing 12-month basis, the PPI rose by a stunning 9.7% in 2021. The core PPI, excluding food energy and trade margins, rose 0.4% in December. The reason for the difference is that wholesale food prices declined 0.6% in December, while energy prices plunged 3.3%. Offsetting those declines, December wholesale trade margins rose 0.8%, as the costs of transportation and warehousing soared 1.7% due to the transportation bottlenecks.

The number of container ships sitting off the ports of Long Beach and Los Angeles is now back above 100 as many longshoremen that operate the cranes have called in sick from Omicron. Looking forward, this means inflation will likely persist on both the wholesale and consumer level, and neither is expected to abate until possibly the second half of 2022, when some supply shortages diminish.

Another factor supporting high inflation this winter is the record cold weather in the Northeast and much of the Midwest, which is expected to send natural gas prices soaring. Additionally, crude oil prices continue to meander higher. In other words, even though energy inflation paused briefly in December, it is re-surging in January – historically our coldest month – meaning that record inflation could persist.

This is a good time to remember that as inflation persists and as the Fed raises interest rates, starting as soon as March, the dramatic appreciation in residential real estate prices is expected to slow as higher mortgage rates and affordability issues curtail the annual pace of price appreciation.

I should add that Fed Chairman Jerome Powell said on Tuesday, before the Senate, that inflation was now the Fed’s primary focus and the Fed would be raising interest rates since the economy no longer needs emergency financial support. This essentially means that the stock market will likely remain your best inflation hedge, especially those select growth stocks that are sustaining strong sales and earnings!

Friday’s December Retail Sales Report Was Truly Dismal

Finally, the Commerce Department announced on Friday that retail sales declined 1.9% in December, which was a massive disappointment, since economists were expecting only a 0.1% decline. Also, November’s retail sales were revised down a notch, to a 0.2% increase, down from a 0.3% rise previously reported. In the past 12 months, retail sales still rose by an impressive 16.9%. In a reversal of form, however, most (10 of the 13) industries surveyed declined in December, led by on-line retailers dropping 8.7%, department stores declining 7%, furniture & home sales slipping 5.5%, followed by a 2.9% decline in electronics retailers. Also notable, vehicle sales declined 0.4% in December.

Many retailers complained that a lack of inventory hindered sales. That is partially true, but there is no way I can make this huge decline during the holiday season look positive, so I expect significant downward GDP revisions by economists in the wake of December’s truly horrible retail sales report. For example, the Atlanta Fed on Friday cut its estimated fourth quarter GDP growth by almost two points to a 5% annual pace, down substantially from its previous estimate of 6.8% annualized GDP growth.

Turning to the weekly jobs data, the Labor Department reported that unemployment claims in the latest week rose to 230,000, up from 207,000 in the previous week. Continuing unemployment claims in the latest week plunged to 1.599 million compared to a revised 1.753 million in the previous week. Economists were expecting the continuing unemployment claims to come in at 1.733 million, so this was a big surprise. Overall, it appears that Omicron may be impacting weekly unemployment claims, but as long as continuing claims continue to decline, it bodes well for an improving job market!

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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