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Key Points for the Week

  • U.S. consumer prices rose 0.6% last month, and the one-year inflation rate accelerated to 5.0%.
  • U.S. job openings reached an all-time high of 9.3 million as employers attempted to fill openings as the economy expands.
  • Chinese imports and exports rose 51.1% and 27.9% respectively, as global trade indicated activity is making up for last year’s slowdown.

On Thursday, the Bureau of Labor Statistics released the Consumer Price Index Summary, which showed prices were up 5 percent year-to-year.

Investors are debating whether the surge in prices at both a producer and consumer level will prove transitory, as the U.S. Federal Reserve believes, or become entrenched as other commentators believe. Much of the angst over medium term inflation pressure becoming hotter is fueled by the backdrop of aggressive accommodative fiscal and monetary policy. This potentially combustible mix has a policy additive from a Fed prepared to tolerate a higher pace of inflation beyond its target of 2 percent for an unspecified period.

Michael Mackenzie of Financial Times

Last week, investors took inflation data in stride. Barron’s reported the Standard & Poor’s 500 Index closed at a new all-time high on Friday. The Nasdaq Composite also finished higher, while the Dow Jones Industrial Index was slightly lower. The yield on longer U.S. Treasuries moved lower, too, which was notable with the inflation data. In theory, rising inflation and rising interest rates should go hand in hand.

Rising inflation remained a top concern for consumers in June, according to Richard Curtin, the University of Michigan Surveys of Consumers chief economist:

Fortunately, in the emergence from the pandemic, consumers are temporarily less sensitive to prices due to pent-up demand and record savings, as well as improved job and income prospects. The acceptance of price increases as due to the pandemic makes inflationary psychology more likely to gain a foothold if the exit is lengthy.

RIchard Curtin, Chief Economist, University of Michigan Surveys of Consumers

Inflation psychology occurs when consumers believe prices will continue to rise over time and begin to spend money as soon as they receive it, according to Investopedia. There is a remedy, according to Curtin:

A shift in the Fed's policy language could douse any incipient inflationary psychology, it would be no surprise to consumers, as two-thirds already expect higher interest rates in the year ahead.

RIchard Curtin, Chief Economist, University of Michigan Surveys of Consumers

This Week in the Markets

U.S. consumer prices continued to go up faster than normal. The Consumer Price Index (CPI) jumped 0.6% last month and has now increased 5.0% over last year. Used car and truck prices rose 7.3% last month and are 29.7% higher over the last year. New car prices increased 1.6%, and airline fares surged 7.0%.

Job openings also jumped and reached an all-time high of 9.3 million as employers continued to be anxious for employees to return to their jobs. Employees haven’t responded as quickly as employers would like. Openings in the leisure and hospitality industry rose 400,000 to an incredible 1.6 million as more restaurants are reopening to indoor dining and finding workers has proven difficult.

Stocks and bonds rallied last week as the jump in inflation was viewed as more likely to be a short-term challenge. The S&P 500, MSCI ACWI, and Bloomberg BarCap Aggregate Bond Index leapt all added to their gains.

Retail sales will be the top focus this week. The U.S and China will report consumer spending as well as industrial production. A number of countries report consumer price data, which we’ll be examining for signs of inflation pressure in countries that have been slower to return to growth.

Job Openings?

There are signs of temporary labor and supply shortages in the U.S. economy and an underlying confidence those shortages will prove temporary. Labor shortages during a period of rehiring resulted in 9.3 million open jobs, an all-time record. Many of the new openings were at restaurants, hotels, and entertainment venues. The leisure and hospitality industry has 1.6 million openings, 400,000 more than last month.

The growing number of openings and lower-than-expected employment gains (see last week’s update) indicate industries are reopening faster than workers are desiring to return to work. The large increase in openings can be due to several factors. Heightened unemployment benefits and other pandemic aid are likely contributors. So are a mismatch in location, as the Midwest has recovered more quickly and the unemployed are more often located on the coasts.

A decline in the number of people wanting to work has also affected rehiring. Some people have likely decided not to return to work. Jobs that may have been filled by part-time workers in the past are going empty, and some people who used to work more than one job have decided their improved financial situation means they can get by on one.

The shortages are also showing up in consumer prices. The CPI gained 0.6% and is now up 5.0% over the last year. Often big jumps in inflation are because of swings in energy or food prices. Both of these often-volatile elements registered lower price increases than the overall index. Energy prices were flat, and food prices rose 0.4% compared to last month.

Instead, the biggest price gains were in items tied to moving around. The shortage of semiconductors has reduced the number of automobiles being produced. A lasting influence of COVID is likely wider vehicle ownership. Those two factors have collided to push used vehicle prices 7.3% higher last month and 29.7% over the last year. New vehicle prices gained 1.6% last month.

In addition to buying more vehicles, people are flying more. Last Friday, the TSA reported more than 2 million screenings. It was the first time the number of screenings had topped 2 million since the pandemic began. A jump in demand often is reflected in prices, and last month was no exception as airfares rose 7.0%.

Market reaction to higher-than-expected inflation was fairly positive. Because the sectors experiencing the biggest price increases were affected by shortages or price hikes to manage surging demand, concerns about a broad inflationary increase declined. While prices are surging now, they are only 2.5% higher than two years ago. As supply challenges are resolved or surging demand for automobiles slows slightly, we expect inflation to settle between 2% and 3% — higher than in the past, but far short of the destabilizing inflation experienced during the 1970s.

Innovation

Businesses have been finding innovative solutions to labor issues forever. For example, dogs were once bred to cook, according to Popular Science’s podcast, The Weirdest Thing I Learned This Week.

When people relied on fire to roast meat, the spit was an invaluable tool. However, turning a spit for hours wasn’t a popular job, so dogs were bred and trained to turn spits. “The first mention of the turnspit dog…was in 1576…The long story short here is that people bred terrier-like dogs to…fit easily into these treadmills that powered various kitchen aids, but primarily the roasting spit.”

By some accounts, the poor working conditions of turnspit dogs in New York hotels contributed to the founding of the American Society for the Prevention of Cruelty to Animals (ASPCA).

Today, pandemic labor shortages have sparked innovation. Companies that are having difficulty finding workers are adopting technological solutions. For example:

  • Modern-day food automats. A vast improvement over food vending machines, some restaurants are using technology to replace servers. Patrons order on a screen and the food is delivered in numbered cubby holes. The kitchen staff is in the back preparing the orders.
  • Grab-and-go groceries. People scan an app before they enter a grocery store that has no cashiers. As they shop, cameras and sensors track what they remove from shelves or bins. “…the technology had to be tweaked to account for how people squeeze tomatoes to test for ripeness or rummage through avocados to find just the right one,” reported Joseph Pisani of the Associated Press. (Tip: When shopping in grab-and-go groceries, don’t take items off high shelves for other shoppers – you may be charged if the person you helped leaves the store with the goods.)
  • Bricks-and-mortar online shopping. A women’s clothing boutique outfitted its new stores with screens so shoppers can select the clothes they want to try on. Then, the shopper is escorted to a dressing room where the clothes are hanging in a wardrobe.

    Another touch screen in the dressing room lets you request even more items and sizes, but instead of awkwardly trying to hail a salesperson in your underwear, you just close the wardrobe, and someone in body-con Narnia adds it through the back.

    Emilia Petrarca, The Cut

What’s your favorite pandemic innovation?

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

June 14, 1877: Congress Adopts the Stars and Stripes

During the American Revolution, the Continental Congress adopted a resolution stating that “the flag of the United States be thirteen alternate stripes red and white” and that “the Union be thirteen stars, white in a blue field, representing a new Constellation.” The national flag, which became known as the “Stars and Stripes,” was based on the “Grand Union” flag, a banner carried by the Continental Army in 1776 that also consisted of 13 red and white stripes. According to legend, Philadelphia seamstress Betsy Ross designed the new canton for the Stars and Stripes, which consisted of a circle of 13 stars and a blue background, at the request of General George Washington. Historians have been unable to conclusively prove or disprove this legend.

With the entrance of new states into the United States after independence, new stripes and stars were added to represent new additions to the Union. In 1818, however, Congress enacted a law stipulating that the 13 original stripes be restored and that only stars be added to represent new states.

On June 14, 1877, the first Flag Day observance was held on the 100th anniversary of the adoption of the Stars and Stripes. As instructed by Congress, the U.S. flag was flown from all public buildings across the country. In the years after the first Flag Day, several states continued to observe the anniversary, and in 1949 Congress officially designated June 14 as Flag Day, a national day of observance.

Weekly Focus

Before you become too entranced with gorgeous gadgets and mesmerizing video displays, let me remind you that information is not knowledge, knowledge is not wisdom, and wisdom is not foresight. Each grows out of the other, and we need them all.

Arthur C. Clarke, Writer

Be yourself; everyone else is already taken.

Oscar Wilde, Poet and Playwright