Numbers That Matter: New year, same economic worries

U.S. Bureau of Labor Statistics

We have a new year, a new Congress, and by the time you read this, we will officially have a new president. And, like many Americans, I feel a heightened sense of anticipation and eagerness to roll up my sleeves and get started.

Why then am I choosing to write my first column for 2025 about inflation? Surely, this must be an old story by now. I am tired of writing about it, and you are undoubtedly tired of reading about it. Hasn't the Federal Reserve already started to lower its interest rates? And hasn't the "soft landing" already been proclaimed? Isn't it time to dig up and discuss a more interesting economic trend?

As I have often reiterated, I do not make the trends; I just identify and analyze them. So far this year, price increases are the predominant economic story. The markets are already starting to reflect this, and I am sure the Fed is also paying close attention to this trend. This is a story that just will not end despite our wishes to the contrary. Allow me to explain, for yet another time, what I see in the most recent data on inflation.

The Bureau of Labor Statistics recently released the data for the Consumer Price Index for December 2024. The overall CPI last month was up 0.4 percent when compared with the November figure. For 2024 as a whole, the CPI for all items increased 2.9 percent.

So right off the bat, we know that an increase of 2.9 percent in the year-over-year total is still above the Fed's target of "consistently in the range of 2 percent." But what is more alarming to me is the rate of change in the monthly numbers accelerated every month in the fourth quarter. The seasonally adjusted monthly change in the overall CPI increased 0.2 percent in October, rose 0.3 percent in November and escalated 0.4 percent in December. In other words, as the Fed was lowering the Fed Funds Rate during the last three months of last year, the pace of overall price increases in the U.S., according to the CPI, was accelerating.

On the table, I have included some of the subcategories that experienced stronger-than-desired price increases in the fourth quarter. For your reference, a persistent average gain above 0.2 percent per month is going to keep the trend above the Fed's long-term target. All of these important categories registered gains above an average of 0.2 percent per month in Q4. Energy prices are particularly concerning.

Unfortunately, the Q4 CPI data is not where the story ends. The official version of the CPI for January 2025 will not be released until the middle of February, but we do have some January data for many commodities. I will not read too much into the data, because the short-term trends can be volatile, and it takes more than just a couple of weeks to establish longer-term trends.

But the longer they persist, the greater the risk that short-term trends will turn into long-term trends. Therefore, I cannot ignore the data just because I want to focus on something else.

Here are some of the products (and the approximate amount of change) that have experienced significant price increases so far this year: crude oil (8 percent); gasoline (5 percent); heating oil (10 percent); natural gas (9 percent); copper (8 percent); silver (4 percent); corn (4 percent); and soybeans (4 percent). As you can see, this list includes sizable portions of the energy, metals and food markets.

Now it will take a few months before the increases in these commodities prices are fully reflected in the prices that consumers pay. And the year is only two weeks old, so there is still time for these prices to reverse course and go lower before they are computed into the final CPI figure for January. But there is also time for them to go higher.

The risk of that happening is already reflected in the recent trend in interest rates on both the 10-year Treasury notes and the 30-year Treasury bonds. Interest rates on these instruments hit a cyclical low point in September 2024, just after the first cut in the Fed Funds Rate. Since that time, they have escalated substantially. Inflation-adjusted yields on the all-important 10-year Notes are hovering near the 2 percent level, and the national average for mortgage rates is bumping up against 7 percent. If the recent price trends in the major commodity markets continue to rise, then it is likely the trend in interest rates will also go higher.

One more trend that bears mentioning here is the recent rise in the value of the U.S. dollar. The value of the dollar has held steady so far in January, but just like the trend in interest rates, it hit a cyclical low point last September and has been in a steady upward trend ever since. The value of the dollar has gone up by 9 percent in the past four months, and it appears poised to go even higher.

Now the rising dollar is not inflationary. In fact, it is usually deflationary. A trend of rising inflation typically puts downward pressure on the value of the dollar. Conversely, a stronger dollar tends to put downward pressure on the prices for energy products, metals and grains. So, I am extremely interested to see just how the combination of all of these trends will play out in the long run.

For now, I can say with confidence that the current environment of accelerating inflation, rising commodity prices, rising interest rates and a rising dollar is not good for the plastics industry. At the present time, growth in the U.S. economy is being propelled by robust consumer spending and a strong labor market. But there are many sectors of the economy, including the plastics industry, that are not yet benefiting from the current economic environment.

It is quite possible that the trends in consumer prices, commodity prices, interest rates and the value of the dollar find an equilibrium in the coming months that will eventually allow the manufacturing and residential construction sectors to thrive — a place in which the trends in the data for the plastics industry turn unequivocally upward.

But as I look at the data for this month — and what this data might herald for the risks to the outlook for 2025 — we are heading in the opposite direction from what I consider a more favorable economic environment. Maybe a new president will help to right the course. Maybe he will make it worse. We now get to find out. As always, the economic data will inform us if we analyze it properly.

* Source : https://www.plasticsnews.com/news/inflation-worries-remain-trump-enters-second-presidency