Inflationary Pressures Remain
Inflation remained uncomfortably rapid in August despite a decline in gas cost as prices continued to soar across a broad array of other goods and services, evidence that the sustainable slowdown the Federal Reserve and White House have been hoping for remains elusive.
Prices rose 8.3 percent from a year earlier compared with an 8.5% CPI print in July, a still-rapid pace of increase and not as much of a moderation as economists had expected. This disappointing data came even as falling gas prices pulled inflation lower, with rapidly rising cost for rent, health care, restaurant meals and goods such as furniture offsetting the relief consumers were feeling at the pump.
Compounding the bad news, core CPI, which excludes gas and food to get a sense of underlying inflation trends, accelerated by more than was expected. The Fed closely watches the core inflation gauge, making its rebound in August a point of particular concern. After cutting out food and fuel, consumer prices climbed by 6.3 percent in the year through last month, up from 5.9 percent in July and more than the 6.1 percent economists had projected.
For policymakers (the Fed), who have been raising interest rates to slow the economy and try to tame recent rapid inflation, the report was a fresh sign that continued “hawkish” action may be needed to wrestle them lower. Economists predict the latest CPI print cemented the case for a third straight .75 basis point Fed Funds rate increase, or that the Fed could opt for an even more drastic full percentage-point adjustment.
The CPI print last Tuesday caused a slump in the equity markets with the S&P 500 losing 4.3%, its biggest drop since the depths of the coronavirus pandemic in June of 2020. Stocks had nudged higher in recent trading sessions, rising 1.1 percent last Monday and nearly 5% over the prior week, as investors increasingly bet on the Fed’s ability to lower inflation by raising interest rates without slowing the economy to the point of tipping into a downturn or hard landing. But higher-than-expected August inflation data released on Tuesday caught investors off guard, sending stocks lower and prompting a rapid re-pricing of how much the Fed may need to raise interest rates to rein in rising prices.
There is always a port in every dark storm, though. Even though the August report showed a 0.1% monthly increase in inflation, there are areas in the economy that have started to feel the effects of rising rates, such as mortgage demand, gasoline prices, and retail inventories. Individuals are driving less than they were pre-pandemic, and mortgage demand is near a 20 year low. Jerome Powell (Fed Chair) knows that his job is not done yet and stated that he will do whatever it takes to stem off inflation even if it means we slide into a recession.
We have spent decades in the wealth management industry and have been through several recessions and many down drafts in the markets. They are never fun, but one thing we have learned is to never underestimate the American economy. Our Declaration makes clear that America was built on the resilience and ingenuity of individual Americans, free from the strong hand of government power. These principles have allowed our nation to survive hard times and emerge even stronger than before, and we are confident that will ring true this time as well.
As always, please let us know if you have any questions or if there is anything we can do for you.