Last week, I provided a quick analysis on the surprise jobs report. In the blog, I shared a perspective
that the continued expected decreasing inflation rate would eventually convince the Federal Reserve to cut interest rates sooner than expected In our opinion, a cut in interest rates would stimulate the economy and be good for business.
A week ago, it seemed an absolute certainty that the inflation rate would continue to decrease, the job market would continue to be white hot, and everyone was buckling up for an uncertain economic future. But seemingly out of nowhere, the Bureau of Labor Statistics sent out a December surprise: seasonally adjusted inflation rose 0.3% for the month and 3.4% for the year. That is a significant number for one month especially when that month is December and the last month of the year.
Both those numbers were higher than expected, and the same was true for core inflation, which doesn’t include food and energy because those two sectors are so volatile and seasonal and are viewed separately.
For the month, core inflation also rose 0.3% and ended 2024 at 3.9%.
Although the initial reaction of the US stock markets seemed minimal – the Dow Jones was actually up a little bit at the end of Thursday, January 11, 2024 - this news will definitely be seen as a negative in the days and weeks to come as most companies were anticipating an inflation rate of about 2% heading into the heart of 2024.
So, what does this really mean from a business acumen perspective? This news confirms that inflation is going to be an issue for the foreseeable future meaning well into the second quarter at the very least. The report sets the official 2023 U.S. inflation rate at 3.4%, down dramatically from the 6.5% of 2022 and 7.0% of 2020. But before 2020 (in the middle of the pandemic), inflation had not reached this level since 2005.
The report presented that shelter was the key cause of higher inflation, with costs rising 0.5% for the month and 6.2% over the last year, and accounting for more than half of the all-items increase.
A few other selected noticeable items from the report:
- Gasoline prices rose 0.2% higher for the month but overall were down 1.9% for the year.
- The costs of food at home rose 0.1% and was up a fairly modest 1.3% for the year.
- The index for meats, poultry, fish, and eggs rose 0.5% in December, led by an 8.9% increase in the index for eggs.
- Electricity costs rose a sharp 1.3% for the month and were up 3.3% for the year.
- Costs of used cars and trucks rose 0.5% in December but were down 1.3% for the year.
- New vehicle costs rose 0.3% for the month and 1.0% for the year.
- Costs of transportation services rose 0.1% for the month but were up 9.7% for the year.
- The motor vehicle insurance index rose 1.5% in December and was up a whopping 20.3% in 2023.
Interestingly, the healthcare inflation rate was nominal rising .7% in December and dropping for 2023 by .5%. Providers and pharmaceutical companies who typically take the political hit for anything that happens in the economy did their part to curb inflation and this time were not the culprits.
What this Means for Interest Rate
The unexpected report will most likely reinforce the Federal Reserve’s resolve to hold interest rates steady until inflation shows signs of decreasing. Based on everything the Fed has indicated, we should still anticipate cuts to the interest rate no later than Q3 which incidentally leads into the Presidential elections.
Take-Aways and Actions
For businesses, here are a few things I think this is going to mean:
- Hold off on capital expenditures a little longer
- Hold off on extra hiring a little longer
- Do more with what you have
- Find ways of being more operationally efficient
- Give people the training and tools to make better business decisions
