The latest inflation numbers are in, and the CPI data is promising, but the devil is in the details.
The Consumer Price Index (CPI) is a vital measure of inflation, reflecting changes in the average prices U.S. consumers pay for a basket of goods and services. However, CPI is usually stated in two flavors, CPI and Core CPI, which is the basket of goods without food and energy. In my video, I highlight the latest CPI report, which came in below estimate, which is good. It shows that inflation is cooling off from its high last summer. This positive outcome suggests that inflationary pressures are subsiding, providing relief to investors and consumers alike.
The Month over Month CPI and Core CPI rose just 0.2% compared to the 0.3% estimate. The Year over Year numbers also beat the 3.1% estimate, coming in at 3.0%. However, Core CPI, without Energy and Food, came in at 4.8%, and while this beat the Y/Y estimate of 5.0%1, it is still over two times the target the Federal Reserve stated.2
The markets have taken off this week on this positive inflation news, which is unsurprising given how the market has reacted over the last seven months. It seems that any good news or glimmer of hope is a time to buy.
Several factors, including lower energy prices, used cars, and airline fares, drove the decline in the CPI. However, shelter costs, which include rent and housing, are still high at 7.8%. Furthermore, vehicle repair and insurance inflation has the highest level of inflation in the latest report, at a whopping 12.7% and 16.9%1, respectively. You've likely already noticed this if you've seen your insurance premium increase lately. Overall the news is good, but there are reasons to be still concerned, and we believe our economy is still not out of the woods yet. I hate to bring this word back, but inflation can be transitory, and just because we're seeing decreases now doesn't mean they won't spike again.
The Federal Reserve and Interest Rates:
The Federal Reserve stated in their June meeting that they, too, remain concerned about inflation. In their continued effort to cool inflation, the Fed has raised interest rates three times this year, a quarter point each time totaling 75 basis points. It is important to highlight that since the Fed began raising rates last March, we've seen a total of 525 basis points of increase from 0% to 5.25% in 16 months3. The Fed is expected to raise rates again next week and possibly in September. One of the reasons for this is because income continues to increase. Inflation is softer than wages, which can work against deflation which is what the Fed is trying to achieve with their Core CPI target of 2%.
Interest rates have a profound impact on the economy, influencing borrowing costs for businesses and individuals. If the Fed continues to tighten monetary policy by raising interest rates, it could have significant consequences for various sectors, including housing, services, and the overall economy. We've already seen bank failures and bankruptcies, and this cycle is likely not over. With debt levels at their highest level, the cost of operating a heavy debt load could be too much to overcome with a weakening consumer. I can not emphasize enough that you cannot borrow your way to prosperity. There is a price to pay for accumulating heavy levels of debt without a capital plan to pay it down.
Macroeconomic Leading Indicators:
Macroeconomic leading indicators offer valuable insights into the future direction of the economy. It is important to monitor leading indicators such as jobless claims, bankruptcies, and consumer balance sheets. These indicators and trends in housing and services can provide critical clues about the possibility of a future recession.
While the stock market may currently appear disconnected from these leading indicators, it's important to understand economic trends that will eventually impact market performance. As an investor, it is essential to consider these indicators while managing investments and assessing the risk tolerance of clients.
Here are a few data signals that my team watches:
- Jobless claims
- Earnings forward guidance
- Delinquency rates on credit
- Bank lending
Where Do We Go From Here?
In light of the market dynamics, the uncertainty surrounding inflation, the impact of rising interest rates, and the potential for a future recession, we outlined our KEY Advisors Summer Game Plan, a cautious investment approach. We are dipping our toes back into equities, but we'll maintain a short leash on investments.
Here are some sectors we're bullish on healthcare, India, aerospace, defense, and energy. We're considering these trades, and they are not long-term holds.
Navigating the market during economic uncertainty requires a deep understanding of key indicators and their implications. In my most recent KEY INSIGHTS video, I provide valuable insights into the significance of the Consumer Price Index (CPI), inflation, the Federal Reserve's role, interest rates, and macroeconomic leading indicators.
By staying informed and remaining liquid and vigilant, investors can make well-informed decisions to manage their portfolios effectively. However, it's essential to recognize the potential risks associated with inflation, future rate hikes, and the impact of leading indicators on the economy.
Remember, investing requires careful consideration of your own financial goals and risk tolerance. It's always wise to consult with a financial advisor who can provide personalized guidance based on your unique circumstances.
Stay informed, adapt your investment strategies dynamically, and confidently navigate the market.
Disclaimer: The information provided in this blog post is for educational purposes only and should not be construed as financial advice. Always consult with a qualified financial professional before making any investment decisions.
Additional Information & Sources:
The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a basket of consumer goods and services.
Inflation is a general increase in prices and a decline in the purchasing power of money.
The Federal Reserve (The Fed) is the central bank of the United States. It is responsible for setting monetary policy, which includes interest rates.
A recession is a period of economic decline characterized by falling output, employment, and income.
U.S. Bureau of Labor Statistics: https://www.bls.gov/news.release/cpi.nr0.htm