Inflation Heated Up in January, Freezing the Fed Consumer prices rose 3%, as fight against inflation continues to face headwinds

The Labor Department said Wednesday that prices rose last month 0.5% from December on a seasonally adjusted basis. That was the largest monthly increase since August 2023 and well ahead of economists’ expectations for a milder increase of 0.3%.

The gain pushed 12-month inflation to 3% in January. That marked a pickup from December, when prices rose 2.9%. (…)

Core prices, which strip out volatile food and energy prices, rose 0.4% from December on a seasonally adjusted basis, the largest increase in nearly two years. Core inflation was 3.3% over the year. (…)

Wednesday’s report was particularly discouraging because housing and rental costs, which have been moderating and are expected to continue to ease, weren’t the culprit. Instead, the latest report pointed to inflationary pressures across other goods and services that had seen a slowdown in price pressures recently. (…)

The Fed measures progress against its 2% target using a separate inflation gauge that stood at 2.6% in December. “We are close, but not there on inflation…. So we want to keep policy restrictive for now,” said Fed Chair Jerome Powell at a congressional hearing on Wednesday morning, after the release of the latest inflation report. (…)

Many companies tend to reset their prices in January, to reflect rising costs from the previous year. The turn-of-the-year bump has been especially large in each of the past three years following the outbreak of inflation in 2021. (…)

In a speech last week, Dallas Fed President Lorie Logan said another such turn-of-the-year jump in prices “will be a signal that monetary policy has more work to do.”

• Hot January CPI Sends a Chill Over the Inflation Outlook

(…) Excluding food and energy, price growth also beat expectations with a 0.4% gain in January. Gains were broad-based among major components. Core goods prices were up 0.3% over the month and roughly flat over the past year as the disinflationary tailwinds from improved supply chains have run their course. (…)

On the services side, core prices rose 0.5%. The closely-watched shelter component rose 0.4% over the month, with both rent of primary residences and owners’ equivalent rents rising 0.3%, in line with their six-month averages. Lodging away from home, however, helped lift the shelter component with a +1.4% rise over the month, which we see as partially tied to the L.A. wildfires given higher-than-usual occupancy in the area during the month. Beyond shelter, outsized gains in motor vehicle insurance (+2.0%), airline fares (+1.2) and recreation services helped drive core services higher.

January’s unexpected strength echoes the pop in prices registered at the start of 2024 and renews questions over residual seasonality (i.e., the inability of seasonal factors to fully capture regular calendar patterns) in the data. However, looking at the year-over-year data to remove issues around seasonality also points to inflation’s ongoing strength.

 

CPI inflation surprised just about everybody. With expensive eggs in their face, the blame went to the “January effect” and the inability of the BLS to properly seasonally adjust the data. This in spite of the fact that “In accordance with annual practice, relative importance values have been updated, and seasonal adjustment factors were recalculated to reflect price movements from the just-completed calendar year.”

In January 2024, core CPI rose 0.37% after 0.27% in December 2023. But February and March were also up 0.37% and 0.38% respectively. In January 2023, core CPI rose 0.41% after +0.37% in December. Yet, February, March and April rose 0.42% on average. January effects, if they existed, would see inflation slowing in subsequent months.

The facts are that

• core CPI has been up 0.3%/month on average since August 2024. Six months is close to a trend, no? That’s a steady 3.7% annualized.
• CPI durable goods has stopped declining last September and has been rising 0.2%/m since, including +0.37% in January. That’s 2.4% annualized.
• CPI services was up 0.5% in January, faster than its 0.35% average in the last 9 months on 2024. That’s 4.3% annualized.
• CPI rent rose 0.32% in January, close to its 6-m average of 0.35%, that’s 4.3% annualized.
• CPI services less rent was +0.5% after +0.3% in December and +0.2% in November. That’s Mr. Powell’s supercore cpi…

It so happens that the Atlanta Fed’s Wage Growth Tracker, released yesterday, shows the 3-m m.a. at 4.1% YoY with “job stayers” stabilized at 4.1% and “switchers” at 4.2%. That’s in line with last week’s employment report showing wages stabilizing at 4.0% since April 2024.

It also happens that there’s a bit of a correlation between wages and service prices which have yet to catch up with wages since the pandemic.

The road to 2% will be long and arduous…

This is from the WSJ Editorial Board:

Trumponomics and Rising Inflation

Does President Trump understand money? Not money as in cash, but the supply of money, the price of money as measured by interest rates, and their impact on inflation? The answer would appear to be no after Mr. Trump called for lower interest rates on Wednesday—the same day the Labor Department reported an increase in inflation for the third straight month.

“Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!” Mr. Trump posted on his social-media site. The layers of intellectual confusion here are hard to parse, especially since higher tariffs will mean higher prices on the affected goods. But perhaps the President wants the public to look elsewhere when assigning blame for rising prices.

Yet if he’s trying to blame the Federal Reserve, which controls short-term interest rates, he has the analysis backward. (…)

The last thing Mr. Trump should be doing now is demanding that Mr. Powell cut rates further and faster—unless the President wants inflation to resume its Biden-era climb. (…)

As Buyers Fail to Show Up, More Homes Are Being Pulled From Sale An increase in the number of properties being delisted could be an early sign of a weakening housing market

Nearly 73,000 homes were pulled from sale after they failed to find a buyer in the final month of last year, data from real-estate analytics firm CoreLogic show.

Delistings tend to spike in winter when fewer people are actively looking for a home. But the trend last December was unusually strong, representing almost one in 10 properties on the market, and a 64% increase from the same month of 2023. 

Most sellers are pulling their homes only temporarily and think they will have a stronger hand if they relist in spring. But the jump in delistings indicates that much of the extra inventory that hit the housing market throughout 2024 sat unsold, so had to be pulled in higher numbers come winter. It also suggests there is a bit more pent-up desire to sell than headline inventory figures would indicate.

The story of the U.S. housing market over the past few years has been that homeowners with cheap mortgages have stayed put as they don’t want to give up their ultralow rates: Around two-thirds of borrowers are paying a mortgage rate less than 4%. This has strangled supply and pushed U.S. home values to record highs.

But the lock-in effect is slowly fading as more people need to move for a job, to accommodate a growing family or some other life event that can’t be delayed indefinitely. In December, 1.15 million homes were for sale in the U.S., a 16% increase from the same month of 2023, data from the National Association of Realtors show.

Still, despite more properties being available, buyers were thin on the ground. Home sales in 2024 were at their lowest level in nearly 30 years.

Home values have held up despite this weak demand, at least so far. Homeowners don’t like to sell for less than their neighbors received and aren’t ready to adjust their expectations yet. Delistings are probably acting as a safety valve, allowing sellers to delay rather than accept a lower offer. (…)

It may turn out that December was an unusually weak month for the housing market. The rate on a 30-year, fixed-rate mortgage crept back toward 7% at the end of 2024, damping demand. Some buyers may hold off until it is clearer where the economy is heading under a second Trump administration.

But if delistings and unsold house-builder inventory remain high over the coming months, it will be a bad sign for sellers. (…)

The rise in delistings also means there could be a shadow inventory of homes waiting to come onto the market as soon as volumes pick up. That may put prices under pressure, even if buyers come out this spring.

Zillow:

Persistently high mortgage rates are having a bigger impact on buyers than on sellers as the home shopping season approaches. Though competition varies greatly by region, most buyers in the market today have a good chance of seeing a price cut on their saved listing. Nearly 23% of listings received a price cut in January, a record high in Zillow data for this time of year.

Rate lock’s hold appears to be losing its grip as homeowners find themselves in a solid financial position and ready to move on — even if it means taking a price cut on their listing. Home equity is near record highs and the general economy and financial markets are surprisingly strong. Zillow surveys of recent sellers show 78% were influenced by life events to make their decision to sell, such as landing a new job or a change in family size.

Buyers, on the other hand, are feeling the sting of mortgage rates that ticked up to 7.04% in January. That’s the highest level since May, and significantly higher than the mid-6% rates seen in January last year. Rates gave buyers facing affordability challenges stronger headwinds in closing the deal – newly pending sales fell 3.6% year over year.

‘Cost and chaos’: Donald Trump’s metal tariffs sweep across corporate America

The FT and other media document how recent announcements will impact American businesses and consumers.

• “So far what we’re seeing is a lot of cost and a lot of chaos,” said Ford chief Jim Farley at an automotive conference on Tuesday.
• Futures tracking the Midwest premium — a vital benchmark for prices paid by US companies, which includes transport, tax and other costs — for settlement next month have jumped 25 per cent since the end of January, according to LSEG data. For steel, even businesses that do not import the metal will feel the tariffs’ impact as domestic mills increase prices. (FT)
• At Coca-Cola, aluminium and steel used in cans and bottles make up 26 per cent of drinks packaging worldwide. Chief executive James Quincey said new tariffs on aluminium imports could force the company to use more plastic bottles. (FT)
• The industry relies heavily on steel and aluminium for oil and gas drilling, pipelines, grid infrastructure and clean energy components such as wind turbines and racks for solar panels. “Unleashing American energy requires access to materials not readily available in the US,” said Dustin Meyer, American Petroleum Institute’s senior vice-president of policy, economics and regulatory affairs. (FT)
• Imports made up 40 per cent of US demand for pipes and other rolled metal goods, used by producers to drill wells, according to energy consultancy Wood Mackenzie.
• A typical car contains about 1,000 pounds of steel costing $6,000-$7,000 per vehicle. The 25% tariff could increase car costs by $1,000-$1,500. (CBS)
• “Many specialty steel products used in our [auto] industry are not readily available from domestic sources, making access to global supply chains essential,” Hanvey said in a statement. (ABC)
• “Let’s be real honest, long term, a 25-per-cent tariff across the Mexico and Canadian border would blow a hole in the U.S. industry that we have never seen,” Mr. Farley said. “And it frankly gives free rein to South Korean and Japanese and European companies that are bringing 1.5 million to two million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever.” (G&M)
• The previous set of tariffs on aluminum cost the U.S. beverage industry $1.7 billion between 2018 and 2022, according to the Beer Institute, an industry trade group. (ABC)

Powell Says Fed Doesn’t Need to Rush on Rate Cuts Fed chair outlines paths for 2025: Hold rates steady if inflation doesn’t improve or cut if the economy slows more sharply

(…) “We’re in a pretty good place with this economy. We want to make more progress on inflation. And we think our policy rate is in a good place, and we don’t see any reason to be in a hurry to reduce it further,” Powell told members of the Senate Banking Committee. (…)

Looking ahead, Powell said the Fed could keep rates on hold for much longer if inflation doesn’t continue to move down to its target and the economy remains solid. He said the Fed could cut rates if the labor market weakened unexpectedly or inflation made faster-than-expected progress declining to its 2% goal. (…)

Powell also said that long-term inflation expectations appear “well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.” and stressed that the labor market was “not a source of significant inflationary pressures.”

Financial markets? No so sure, unless he meant anchored to the early 2000s:

Small Business Optimism Falls Back Slightly in January

The NFIB Small Business Optimism Index dipped 2.3 points in January following surges in November and December. Despite the setback, the index remains far above its prevailing level over the past three years. Most of the recent improvement, which coincided with the 2024 election outcome, was driven by the “softer” index components surrounding economic expectations and credit conditions. The “hard” components of the index, e.g. job creation plans, job openings and capex plans, remain muted compared to pre-pandemic norms. On the upside, labor market deterioration appears to have stalled amid a sideways movement in job openings and slight improvement in hiring plans. On the downside, small businesses are experiencing little relief on the inflation front. Owners also expressed a pickup in general uncertainty, possibly driven by recent volatility in tariff announcements. (…)

 

China’s Cabinet Pledges to Boost Spending, Attract Foreign Investment It will intensify support for trade-in programs while boosting spending in the cultural, sports and inbound-tourism sectors

In a weekly meeting chaired by Premier Li Qiang, the State Council said Monday that it will work to increase residents’ incomes, promote sustainable income growth and expand property-related income channels, all of which are aimed at stimulating domestic consumption.

The government didn’t provide specific details on how it plans to raise incomes, but analysts expect that the central government will likely propose enhanced pension and healthcare coverage at the coming annual legislative meeting in March. Next month’s meeting is also expected to unveil China’s economic growth target along with other supporting policies. (…)

In Monday’s meeting, the State Council said the government will intensify support for trade-in programs this year while boosting spending in the cultural, sports and inbound-tourism sectors.

According to data released Monday by the National Development and Reform Commission, the trade-in initiatives launched so far have spurred sales of automobiles, home appliances, furniture and various digital products.

During the eight-day Lunar New Year holiday, these programs generated more than 31 billion yuan in revenue, equivalent to $4.24 billion, with home-appliance and mobile-phone sales surging 166% and 182%, respectively, compared with the previous year.

While these trade-in programs have temporarily lifted spending, economists warn that their impact may gradually fade as the year progresses. (…)

• China Mulls $6.8 Billion Funding to Help Vanke Repay Debt Special local bonds to be used to buy unsold homes from Vanke

Under the plan, regulators would allocate 20 billion yuan of special local government bond quota for the purchase of unsold properties and vacant land from Vanke, said the people, asking not to be identified discussing private information. The money would enable the Shenzhen-based developer to pay public and private debt due this year, the people added.

Vanke and its affiliates would also be allowed to tap other financing sources including new bond sales and bank loans for debt payments, the people said, adding that the details of the plan could still change. It couldn’t be determined if Vanke has started any work on specific bond issuance.

The proposed financial backing is a further sign that Beijing is drawing a line in the sand for Vanke so that the state-backed developer doesn’t suffer the same fate as China Evergrande Group and other private firms that defaulted on their debt in recent years. Vanke is facing a funding gap this year as the cash-strapped developer has $4.9 billion of bonds maturing or facing redemptions at a time of slumping home sales and limited access to fresh liquidity. (…)

The developer said it has 36 billion yuan of public debt due this year and has repaid 3 billion yuan in January.

Other than publicly issued debt, Vanke also had 91 billion yuan of short-term bank loans and borrowings<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> from financial institutions outstanding by the end of September, according to its financial report.

The local government of Shenzhen last month stepped in to take management control of Vanke, which warned of a record $6.2 billion loss for 2024, and vowed to “proactively support” its operations. Vanke received a 2.8 billion yuan loan this week from its largest state-owned shareholder, Shenzhen Metro Group Co. (…)

“It seems we can rest assured that there will be no more defaults, at least not by any SOE developers from here,” said Zhu Zhenkun, a fund manager at Hainan Shire Asset Management Co. He added that the size of the support and government’s resolve exceeded his expectation. (…)

As China’s housing crisis extends into its fourth year and dozens of private companies have defaulted, authorities are trying to ring-fence state-backed developers like Vanke. Vanke operates across the country and has deep roots as just the second company to list on the Shenzhen Stock Exchange in 1991.

A default by the bellweather firm would batter home sales further and erode confidence in other state-controlled builders such as Poly Developments and Holdings Group Co. and China Overseas Land & Investment Ltd., which are now the country’s biggest developers by sales. Vanke, which employs about 130,000 people, ranked fifth by sales last year. (…)

Residential sales resumed falling in January, suggesting the property sector has some way to go before it can show a sustained recovery. The value of new-home sales from the 100 biggest real estate companies dropped 3.2% from a year earlier to 227.6 billion yuan. Sales were also flat in December, according to data from China Real Estate Information Corp.

• China’s Property Crisis Enters a Dangerous New Phase

(…) The unprecedented intervention has triggered a sigh of relief in markets, but it also underscores a somber reality: The property crisis that hobbled China’s economy and created a nearly $160 billion pile of distressed debt — the world’s largest — is getting worse.

Signs of trouble are now popping up everywhere. A brief revival in home sales has fizzled despite multiple rounds of stimulus from President Xi Jinping’s government. Chinese bankers have mostly stopped lending to real-estate projects outside major cities such as Shanghai, according to people familiar with the matter. And international creditors are losing patience: More debt restructuring deals are unraveling and at least a dozen developers face petitions to liquidate, including once-storied names like Country Garden Holdings Co.

The pain is also spreading to Hong Kong as Chinese homebuyers and tourists pull back. New World Development Co., a real-estate giant controlled by one of the financial hub’s richest families, is racing to sell assets and mortgage some of its marquee properties as losses mount. (…)

The resulting crash in the market led to the destruction of $18 trillion of household wealth, by one analysis. Home prices have plunged about 30% from their 2021 peak, according to economists. The housing sector has seen its contribution to the economy shrink from about 24% to 19%. (…)

The depressed housing demand is derailing the progress of defaulters which were seemingly recovering. Sunac China Holdings Ltd., whose successful debt restructuring in 2023 was hailed as a role model by creditors, recently said it “can’t rule out” a second overseas restructuring as market conditions are worse than expected.

The list goes on. Fellow defaulter China Fortune Land Development Co. is mulling scrapping a creditor-approved debt plan for a court-led solution, a rare approach for developers in China, people familiar with the details said in January. The developer declined to comment at the time on the Bloomberg report. Liquidation petitions are piling up again at Hong Kong’s court, with targets including Shimao Group Holdings Ltd., once one of the nation’s biggest builders, in recent weeks. (…)

Yet, lending for projects outside of key cities, such as Shanghai and Hangzhou, have more or less been suspended, according to bankers involved in the business who declined to be identified discussing confidential matters. Getting on the White List is no guarantee to secure loans, with banks scrutinizing the viability of projects as they weigh the risks for them, the executives said. (…)

Less than 10% of loan applications were approved for one of the largest Chinese developers on the White List, an executive said, declining to be identified discussing confidential matters. For all the support, Chinese builders received 6.1% less funds from banks last year, a fourth consecutive annual drop, official data show.

“Properties in second and third-tier cities are not selling well,” said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co. “We’re worried that developers’ liquidity may break one day.”

The impact of a weak Chinese economy is also rippling across into Hong Kong. New World borrowed heavily to fund mega retail and commercial projects such as 11 Skies and Victoria Dockside to capitalize on spending by tourists and companies from China. It also acquired land across the border.

But, with retail spending plunging and Chinese companies rushing to sell office towers in Hong Kong, the average prices of commercial buildings, shopping malls and other properties have fallen more than 40% from their highs in 2018. (…)

It seems we are entering the final chapter of this long, slow moving, saga. Beijing is busy trying to write a happy ending. It cannot afford anything else.

AI CORNER

Ex-Google chief warns west to focus on open-source AI in competition with China

Former Google chief Eric Schmidt has warned that western countries need to focus on building open-source artificial intelligence models or risk losing out to China in the global race to develop the cutting-edge technology. (…)

“If we don’t do something about that, China will ultimately become the open-source leader and the rest of the world will become closed-source,” Schmidt told the Financial Times.

The billionaire said a failure to invest in open-source technologies would prevent scientific discovery from happening in western universities, which might not be able to afford costly closed models. (…)

Worth your time. An interview with ASML CEO: https://open.spotify.com/episode/4ZCwppZ0bf1wnDsD4T8V73?si=j5zKky82Qwm7E6D4VWSkOA

You Like to Bet on Sports? Here’s a Reality Check. Study finds that the average bettor expects to make a little money on future bets, even though the average result is a loss of 7.5 cents per dollar

(…) A new study by Stanford University researchers finds that the average online sportsbook customer expects a gain of 0.3 cent for every dollar wagered. In reality, sports bettors lose an average of 7.5 cents per dollar wagered, reflecting “widespread overoptimism about financial returns,” according to Matthew Brown, a Stanford doctoral student and lead author of the study. (…)

In the 30 days before the study began, the median participant wagered $153 a week, though more than 25% of participants bet more than $1,000 a week. The median participant placed 17.4 bets a week at an average bet size of $10.30. (…)

“We found that people more or less understood the amount of money they had lost in the past, but they just thought the future would be better,” Brown says. (…)

Wanna bet on that?