Inflation is hot. This statement accurately captures not only the recent trend in the data that measures the rate of price increases in the U.S. economy but also it describes the amount of attention this trend is generating among policymakers, business managers and consumers.
The latest Consumer Sentiment Index from the University of Michigan dipped to 68.8 in January, its second-lowest level since 2014. For context, this index averaged 82.9 in the first six months of 2021, but it has averaged only 70.3 in the past six months. The omicron variant was the main reason for the drop last fall, but as we start 2022, the top concern for respondents, especially from lower-income households, is inflation. The percentage of respondents who reported being worse off financially than a year ago is also at its highest level since 2014.
This concern was echoed by the latest Small Business Optimism Index, compiled and reported by the National Federation of Independent Business. The overall index decreased only slightly in January to 97.1, but the single most important business problem for the second month in a row was inflation. Last month, 22 percent of business owners reported that inflation was their top concern. This was unchanged from December, and it was the highest level since 1981. The net percent of owners raising their selling prices, another indicator of inflationary pressures, jumped to 61 percent, the highest reading since 1974.
At their latest meeting, the Federal Reserve Board announced that it would hike short-term interest rates in March. This will be their first hike in three years. The board did not announce the size of the hike, nor did it say how often or how much it would hike rates later this year. There is speculation on Wall Street that the Fed may need to hike rates seven times this year. Last year at this time, the first hikes were not expected until 2023.