9.1%. This is the number that many investors are focusing on as we head into mid-summer. 9.1% is the year-over-year percentage change in the Department of Labour’s Consumer Price Index (CPI), which measures the prices of a basket of goods and services each month. Broadly speaking, the CPI measures inflation, and this June figure, reported last Wednesday, is the biggest increase since November 1981. As the United States (and the rest of the world) faces d ‘significant financial hurdles in the months and years ahead due to global supply chains and the fallout from the Russian invasion of Ukraine, inflation is perhaps the most significant challenge. The Federal Reserve really needs to get ahead of inflation before it does too much damage to savings and to US business and consumer confidence.
large order
Jerome Powell and the Fed face a difficult task. How do they curb inflation to protect the purchasing power of American savings while avoiding plunging the economy into free fall, and this, by using the brutal instrument of interest rate adjustments? Rising rates certainly slow growth, but they also work with a lag. The changes made today take several months to have their effects on the economy. With June’s hot inflation reading, the Fed will almost surely raise the Fed Funds rate by at least 0.75% at its meeting in late July and could even raise it by a full percentage point. While the goal is a “soft landing” to see inflation cool while preventing the economy from tipping into recession, the Fed has tightened policy too much on several occasions and thus helped foment slowdowns economic.
The big wish of investors
High inflation benefits no one, so even investors are calling on the Fed to provide enough bitter pills (in the form of rate hikes) to quell runaway inflation. There is no right choice: it is between high inflation or a much slower (possibly contracting) economy. Most investors, including this one, will choose the latter. Investors therefore really want to see a Fed that is clearly dedicated to controlling inflation, but they are also keen to see at least some nascent results from the Fed’s efforts over the next two months. It is clear in hindsight that the Fed waited too long to act, but it is now catching up fast.
signs of hope
Despite the difficult inflation reading of 9.1% in June, there are growing signs that the inflation rate will slow in the coming months. The Bloomberg Commodities Index is down around 18% from its 2022 highs, with Brent crude down around 20%, lumber down nearly half and copper down. down by a third. Agricultural commodity prices, as measured by the S&P GSCI, are down about 25% from two months ago. Gasoline prices, a big contributor to June inflation, have fallen about 8% in the past month. Home price appreciation has also slowed markedly in a number of markets as supply dries up and the number of unsold properties begins to climb, albeit from very low levels. Many retailers, including Target, were overstocked in the spring and may have to cut prices on clothing and appliances to get rid of excess inventory. Finally, prices for used cars and trucks have also fallen in recent months, helped in part by the slow healing of supply chains. Thus, there are many signs that prices are cooling. We’ll just have to see if they trickle down to inflation numbers by the fall to potentially get the Fed to moderate its current regime of rapid rate hikes. Stock and bond investors, both of whom suffered quite a bit in the first half of 2022, just want to see the Fed’s plan start working!
Expect a choppy second half
Even if inflation stabilizes in the coming months, the Fed still has a lot of work to do to bring it back to its 2% target. The labor market continues to be very vigorous and consumers, in general, are in good financial health even if they have less confidence in the future. With the relatively strong economy as a backdrop, however, the Fed is likely to have to push harder for demand to soften enough to cause prices to drop significantly.
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