Affordability, Inflation, and Jobs: Where the Economy Stands as Year-End Approaches

Affordability, affordability. Cost, cost. Inflation, inflation. Employment, employment. And the traditional Santa Claus rally, will we have one?

As the year ends, where are we on these major economic issues.

The economic uncertainty described in previous market commentary continues. The last two weeks have shown hesitancy and doubt about the Artificial Intelligence rally of the past year. As the selloff continued for four days, inflation numbers came out today at 2.7% month over month, closer to the Fed target of 2%. As a result of the government shutdown though, there are some holes in the report. The report in general represents two months because of the shutdown. The annual increase in inflation year over year fell to 2.6%, below the expected increase of 3%. The cost of shelter is cooling as well, in terms of the increase in cost declining from the previous month. Although grocery prices are increasing, they are increasing at a slower rate.

For additional context on elevated market risk and shifting expectations, see our economic uncertainty market commentary .

Questions Beneath the CPI Headlines

On the other side, questions remain. Because of the government shutdown, there is data missing. There is also an energy spike indicated that could be particularly painful with winter heating costs rising significantly. Some service costs such as health care and car repair services are experiencing large increases. Analysts and economists are looking at the gaps and commenting that those gaps place a burden on the data from the Bureau of Labor Statistics, which is experiencing a reduction in force and political pressure to have the data be more favorable for the administration.

In periods like this, valuation dispersion tends to matter more. If you want a related read, our perspective on overvalued and undervalued markets and investment positioning may be helpful.

Federal Reserve Policy, Inflation Risk, and Labor Market Weakness

Preceding the latest CPI numbers was the Federal Reserve meeting at which the Fed funds rate was lowered by 0.25%. The caveat from Jerome Powell was that future increases were subject to data as before, and concern about inflation was balanced by concern about weakness in the labor market. It is really the Fed navigating a tightrope with continued political pressure advocating for lower rates.

The history of consensus from Federal Reserve voting governors is fracturing as never before, with voting members having doubts about lower rates at the same time the Trump appointed governor advocating for a half point decrease. 2026 will bring the end of Jerome Powell’s term as Chairman and provide the current administration the ability to appoint the new governor. The administration is emphasizing the desire for a governor that will reduce rates more reflexive of the administration political view of interest rates. If this becomes the case, there are indications that markets would react unfavorably, as markets value the independence of the Fed.

Government Shutdown Risk and the Santa Claus Rally

We are also faced, in the new year, with another possibility of a government shutdown January 30th, with the same issues lurking that caused the last shutdown.

As far as the traditional Santa Claus rally, so far it is not happening. Of course there is still time, so we shall see.