Sticky Prices

woman looking at long grocery receipt

The S&P 500 Index had only its second weekly loss year-to-date but did stay above the 5,000 level. For the week, the S&P 500 Index was -0.3%, the Dow was just a touch positive, and the NASDAQ was -1.5%. The S&P 500 Index was led by the Energy, Materials, and Utility sectors, while the Technology, Consumer Discretionary, and Communication Services sectors lagged. The 10-year U.S. Treasury note yield increased to 4.295% at Friday’s close versus 4.187% the previous week.

The Consumer Price Index (CPI) and Producer Price Index (PPI) reports for January showed inflation remained sticky. CPI was +0.3% month-over-month (m/m) and +3.1% year-over-year (y/y). Core CPI, which excludes food and energy prices, was +0.4% m/m and +3.9% y/y. PPI was +0.3% m/m and +0.9% y/y. Core PPI was +0.6% m/m and +2.6% y/y. The reports have caused a shift in investor expectations that the Federal Reserve may not lower short-term interest rates until June. CME Fed funds futures imply a 90% probability that rates remain in the 5.25% to 5.50% target range for March and 61.6% for May. The probability for a first rate cut in June is 53.7%.

We are in the tail-end of the fourth quarter earnings reporting period with 395 companies in the S&P 500 Index already reported. An additional 33 companies are scheduled to report earnings this week. Current fourth quarter expectations for the S&P 500 Index are earnings growth of 9.6% and revenue growth of 3.3%. For full-year 2023, S&P 500 Index earnings are expected to grow by 4.0% with revenue growth of 2.1%. For full-year 2024, earnings are expected to grow by 9.5% with revenue growth of 4.8%.

In our Dissecting Headlines section, we breakdown the CPI to see where inflation is impacting the economy.

Financial Market Update

Dissecting Headlines: Inside the CPI

January CPI showed consumer prices 3.1% higher y/y. While most price categories remain higher, they are partially offset by some deflationary categories.

If a recent trip to the supermarket felt expensive and eating out felt even more expensive, you would be correct. Food away from home (i.e., restaurants) is 5.1% higher y/y whereas food at home (i.e., grocery purchases) is only 1.2% higher y/y with some categories such as meat (-0.9% y/y) and dairy (-1.1% y/y) helping stem overall price increases.

Pump prices at the gas station might look lower with gasoline prices 6.4% lower y/y. At home, your utility bill may be a mix with electricity prices 3.8% higher y/y, but natural gas services 17.8% lower y/y.

In the core inflation areas, shelter prices remain inflationary, +6.0% y/y. This is an important category since it counts for more than one-third of the overall CPI. Other inflationary categories in the core include hospital services +6.7%, motor vehicle maintenance and repair +6.5%, and motor vehicle insurance +20.6% y/y. These are partially offset by used vehicle prices -3.5% and airline fares -6.4%.

Taking a trip, by car or plane, looks attractive, but it will cost more to eat when you get there.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.

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