Consumer spending remains strong despite decades-high price increases in December shown by the latest Consumer Price Index report.
“[December’s] inflation report continued to reinforce the theme that gaudy price gains are not standing in the way of demand,” Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the BlackRock Global Allocation Investment Team, said in a statement following the release of the CPI report.
“Remarkably, though,” he added, “Demand is showing very little let-up despite these prices staying sticky high, with the rapid transmission of the Omicron variant of the virus making a return to normalcy a more extended process.”
The CPI rose 7% from the previous year in December, while the core CPI (measuring price increases excluding the volatile food and gas prices) rose 5.5%. The increase marked the CPI’s biggest monthly increase since 1982.
Still, in some sectors, consumer demand continues to climb undeterred. U.S. grocery stores are facing high demand and higher costs, in what Stew Leonard's CEO Stew Leonard Jr told Fox News was a "perfect storm" for supermarkets.
The Federal Reserve has been at the center of the inflation concerns. The FOMC’s November meeting minutes revealed that the Fed projects that three rate hikes will occur in 2022. On Tuesday, Federal Reserve Chairman Jerome Powell further reinforced the notion of a more hawkish Fed policy for the coming year.
The Fed announced they would accelerate the tapering of COVID-era bond purchasing back in November in order to cool inflationary pressure on the economy.
BlackRock’s Reider warned that too much quantitative tightening could hurt the economy.
“We think the Fed will raise rates shortly (probably in March) after ending QE, but we think that the draining of liquidity should only be initially designed to target the excess reserves recently created,” he said. “In our view, it would be a mistake to go significantly deeper at this point, as the pressure on the growth, employment, and financial markets can react in a more extreme manner than required to bring down inflation, which is likely evolving toward a lower trajectory in the coming months anyway.”
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.