January’s economic reports highlighting December activity were the first to reflect the rise of the Omicron variant and its impact on the broader US economy.  A crucial FOMC meeting, inflation reports and the advance reading for Q4 GDP also headlined the month.

The Federal Reserve met in January and Chair Powell appeared every bit chastened by the very non-transitory nature of the surge in inflation.  Accelerated tapering followed by a well-telegraphed series of interest rate hikes are what investors should expect in the months ahead, as the Fed struggles to get its arms around pandemic induced labor and supply chain shortages.

The Consumer Price Index rose +0.5% in December for a +7.0% YoY rise, the highest reading since 1982.  Ex-Food & Energy, prices surged +0.6%, or +5.5% YoY.  Producer Prices only ticked up +0.2% for the month, but are up an astounding +9.7% for the year.  Core PPI rose +8.3% YoY, while the Fed’s preferred measure of inflation, the PCE Deflator, gained +0.4% in December for a +5.8% annual increase.  No matter which measure one uses, prices for nearly everything are materially higher and likely to stay that way for the foreseeable future, or until the Fed hikes interest rates.

The advance reading of 4th quarter GDP showed economic output surging by a +6.9% annualized rate in Q4, up from Q3’s +2.3% rate and topping estimates for a +5.5% rise.  Personal Consumption was up +3.3%, beating the prior quarter’s +2.0% reading, but slightly below analyst expectations for a +3.4% gain. Rising prices are beginning to impact the all-important US consumer as Personal Income rose +0.3% in December while Personal Spending dropped by -0.6%.  As we begin year 3 of the pandemic, multiple variants and COVID-related mitigation measures have weighed heavily on reopening plans and directly impacted the travel and leisure arena.

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