By Jim Reardon | January 2022
Inflation: A Major Story
Every time we visit the gas pump or grocery store, we are reminded that inflation has also been one of the key stories of 2021. In October, consumer prices jumped 6.2% – the most in 30 years and the story on inflation continues to unfold. Federal Reserve Chair Jerome Powell has stated that inflation is likely a temporary post-pandemic condition. But the steady beat of rising prices — plus continuing snags in the supply chain and product shortages — is making inflation a concern for many consumers and investors.
Americans are now tuned in to inflation
Consumer prices rose half a percent in December and pushed the annual inflation rate to a nearly 40-year high of 7%. The gain in the Consumer Price Index (CPI) exceeded the consensus forecast of a 0.4% rise. A separate measure of inflation that strips out the often-volatile food and energy categories, so-called “core CPI”, rose 0.6% last month. That pushed the increase over the past 12 months to 5.5% from 4.9% - a 31-year high.
Inflation has soared due to strong consumer demand and ongoing labor and supply shortages. In a consumer survey by the Federal Reserve Bank of New York, American consumers predict 4% inflation for the next year and 3.4% for the next three years — the highest levels since the survey began in 2013.
High inflation is the number one concern among small-business owners
The National Federation of Independent Business (NFIB) reported nearly 22% of survey respondents said inflation was their top problem. That was its highest reading in 41 years. NFIB Chief Economist Bill Dunkelberg addressed the gravity of the situation writing in the release: “Inflation is at the highest level since the 1980s and is having an overwhelming impact on owners’ ability to manage their businesses.”
Still, despite struggling with higher prices, small businesses also reported being more optimistic about the future. The NFIB’s small-business optimism index rose 0.5% to a three-month high of 98.9. High inflation overtook skilled labor shortages, which had been the biggest concern among owners for most of the past year. Nearly half of all owners said they could not fill open jobs despite a record number reported increasing pay.
Inflation isn’t limited to the United States
The inflation pinch is being felt in other parts of the world as well. In Europe, inflation also reached 13-year highs with a 3.4% increase in September, led by rising energy costs.
Social Security recipients will see a major cost of living boost
Inflation is always a concern for retirees. People receiving Social Security benefits will see a major increase in benefits for 2022. The 5.9% cost-of-living adjustment for Social Security recipients is the largest in 39 years and follows average annual adjustments averaging 1.65% over the past 10 years. The increase raises the average Social Security payment for a retired worker to $1,657 a month next year. For a typical couple, the monthly benefit will rise by $154 to $2,753 per month.
Through it all, the Fed Chair advises continued patience, “We think we can be patient and allow the recovery to take place and allow the labor market to heal,” Powell said. He did indicate that the economy should be ready for a rate hike next year. “No one should doubt that we will use our tools to guide inflation back to 2%,” Powell said.
A year spent navigating uncharted territory
2021 has been a year spent navigating truly uncharted territory. It was the second calendar year of the Covid-19 pandemic and the beginning of a new vaccine era. It was a period of continued economic and social fallout from the pandemic and a period of change in political leadership. It was a year that featured the mainstreaming of new and very promising immunotherapies and vaccines as well as, continued advances in groundbreaking technologies.
Throughout 2021, our Situation Reports brought you some of our thoughts as well as highlighting market trends and economic indicators. In case you missed some of them, here are highlights and updates.
Supply Chain Problems
When manufacturing and transportation issues hit in the spring, we reported on supply issues caused by pent-up consumer demand for products, declining inventories, a pandemic related shortage of skilled and unskilled workers, and ongoing travel restrictions. As we moved into the final days of the year, supply chain delays, product shortages, and rising shipping costs continued to impact consumers and businesses.
One thing that changed is Americans' attitude toward work
The number of Americans quitting their jobs surged by 370,000 to a record 4.5 million in November, the Labor Department reported. The November reading pushed the so-called ‘quits rate’ to 3%--also matching a prior record high.
The 2021 worker shortage has become so much of a cultural phenomenon that it was given a name: “The Great Resignation.” Since April, over 20 million workers have quit their jobs. A record breaking 4.4 million Americans voluntarily quit their jobs in the month of September alone, and the work world looks very different than it did pre-pandemic.
The realignment that is taking place is likely to bring a new reality for employers and workers for some time to come. McKinsey Global Institute conducted a survey in August 2021 that found 40% of employees are at least somewhat likely to quit their jobs in the next 3-6 months. That includes 41% of white-collar workers, 43% of goods producing workers, and 47% of leisure and hospitality workers.
Astonishingly, most of those who say they are at least somewhat likely to quit in the next six months are willing to do so without another job lined up.
Source of Charts: McKinsey
One quarter of white-collar workers who had already quit their jobs at the time of the survey did so without another job lined up.
Source: John Mauldin, Thoughts From The Frontline
This stunning quit rate is being driven primarily by younger workers between 18 and 34, whose job satisfaction has plummeted in the last year.
Besides the numerous cultural and values differences with older generations, Millennials have had a rough financial go of it since the Great Recession. Straddled with more student debt, fewer well-paid job opportunities, and a lower homeownership rate than their parents at the same age, many younger workers feel perpetually behind in life. Should it be any surprise, then, that the quit rate has soared as the economy has recovered and employers have sounded the call for workers to return to the daily commute?
While it may seem odd for young people to express that feeling by quitting their jobs, it signifies that the pandemic has catalyzed workers to take decisive action in reshaping their lives to reflect their desired lifestyles.
Along with these challenges, 2021 brought new investments to the forefront.
The Crypto-Crazy World
2021 may be the year that cryptocurrency fully entered the public consciousness. According to a poll from Newsweek, about 46 million Americans — or 17% of the adult population — own at least a share of Bitcoin.
When a piece of digital artwork created by a little-known artist sold at auction for $69 million this spring, NFTs (nonfungible tokens) suddenly became the latest hot crypto currency topic of conversation. We will continue to keep you up with the puzzling new developments in the crypto currency world.
Investors no longer need to choose between doing good and doing well. ESG (environmental, social, and governance) investing is going mainstream. With the U.N. global climate summit grabbing political headlines in the last months of the year, it’s worth noting that, one out every three dollars invested by Americans—a total of more than $17 trillion went to some form of sustainable investment product or resource according to the Forum for Sustainable and Responsible Investing.
In 2022, several factors are likely to encourage greater interest in ESG investing: an increasing focus by business leaders (particularly the auto and energy industries) on responding to climate change; investor enthusiasm for the “social” side of ESG investing—particularly among non-profit organizations; and the potential for government actions promoting ESG investing.
In December, several representatives introduced bills in the U.S. House promoting acceptance and use of ESG investments by individuals and institutions. Also, the Labor Department is reviewing retirement plans with the objective of making it easier for fiduciaries of retirement plans to introduce ESG fund alternatives.
We are aware of the investment trends and sensitive to the needs of our investors--both institutional and individual. We are capable of doing ESG screening and introducing ESG funds for investors who wish to explore this possibility with us during our client meetings.
What new developments lie ahead in the new year remain to be seen. Our Situation Reports will continue to supplement your regular meetings with topics that will be of interest or importance.
Be on the lookout for an update from us on what we’re seeing with the market currently. It’s been a disastrous start to 2022 for the market as the risks and concerns we had throughout 2021 have seem to finally be realized. We’ll explain what our signals and indicators are showing and how we’re reacting.
Jim Reardon is a financial planner and advisor, and the Chief Investment Officer for ProActive Capital Management, Inc. He has over 20 years of experience pro-actively managing assets for clients and non-profit organizations. A Certified Financial Planner™, Jim is a graduate of Kansas State University and Washburn University School of Law. He holds licenses in law and securities and was admitted to the Kansas Bar in 1973.
Certifications and Licenses: Series 7/63/66 Securities Licenses, Certified Financial Planner™ (CFP®), J.D.