Labor Markets and Interest Rates
Last week the US Labor Department announced that price increases year over year were 8.5% meeting expectations by analysts. This is the most rapid increase in inflation in 40 years. Forty years ago, some of you were not born yet or were so young that you wouldn’t remember the impacts of high inflation.
The culprits: goods and services that many of us purchase every day like gas, food, rent. Further, wages are increasing though not as quickly as inflation. What the Labor Department calls “core inflation” - inflation excluding food and energy - increased less than expected, so stocks rallied and interest rates fell. Excluding food and energy? Yes, because food and energy costs are volatile and changes in both happen separate from the consumer price index. What does that mean exactly? Since spending on food and gas has doubled in the past 6 months, how does it make sense to exclude those costs increases? Immediately after, the markets then changed direction and fell for the day. How will markets react to further Fed tightening or raising interest rates? One day later markets are higher as earnings season begins. Volatility at its finest with resulting market movements down to end this week.
An example of price extremes in my life is our car lease ending in July. We spoke to the salesman who sent me the residual price for our car at the end of the lease. I then checked Kelley Blue Book for the resale price of our car and it was almost $15k higher. In other words, we can buy our car for the residual value at the end of the lease and then resell it for $15k more making a large profit. However, in the latest inflation numbers, it turns out that car prices appear to be falling.
Gas prices have been falling too, albeit in small doses. I am sure we all notice that when oil prices rise, gas prices rise even more. When oil prices fall, gas prices fall much slower, if at all. We all wonder why, as experts explain, prices are set by the market and internationally. I never completely bought that explanation. Try boycotting gas for your car! Electric vehicles? Will record-setting gas prices drive increased purchases of electric vehicles? How about alternative energy sources to wean us off fossil fuels which increase world dependence on rogue states and also contribute to climate change? What is the future of alternative energy generation? It can only be positive because of cost and climate change economics.
The Securities and Exchange Commission has proposed to enhance company disclosures including climate-related risks including greenhouse gas emission rates. Many areas of concern and investor risks regarding climate change would need to be disclosed in investor material. These rules are proposed and we await to learn more about what the corporate response will be.
Earnings season begins this week with JP Morgan reporting a large charge from increased loan reserves resulting from the Ukraine war and volatile markets especially in the commodity area. It doesn’t appear that positive earnings surprises will move markets in light of interest rates, inflation and war.
One strategy to curb inflation erosion:
Series I US Savings Bonds For A Guaranteed 8.37% Return | Seeking Alpha
Articles on the Morphing Jobscape of the Labor Market for Desk Dwellers:
Gen Z and Millennials are Disrupting the Workplace As They’re Choosing to be Jobless Rather Than Work for a Company They Don’t Like
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