Mar 18, 2024

Are We There Yet

Weekly Market Commentary

The road to price stability has been long and arduous. Inflation doesn’t just impact investors. It impacts everyone, from shoppers to travelers to those on a fixed income.

February’s Consumer Price Index (CPI) marks the second straight month of stronger-than-expected inflation. The core CPI, which excludes food and energy, rose 0.4% in both January and February (U.S. Bureau of Labor Statistics). The CPI rose 0.4% in February and 0.3% in January.

We hope it’s a temporary setback, but the last two months signal that the road to price stability is taking an unexpected detour in the new year.
At a minimum, it suggests the Fed can be patient as it hopes to start lowering rates later this year. It could also bolster the idea that today’s interest rates may not be as restrictive as they would otherwise appear.

The graphic below illustrates that progress has stalled. But it also shows that the rate of price hikes has gradually risen since the middle of 2023.

Others argue that the CPI’s shelter component does not correctly capture what’s happening to rent. They contend the shelter component is currently overstating costs. If shelter is removed from core inflation, prices are much more stable, rising at 2.2% annually over the last three months.

The bottom line is that investors are eyeing interest rates. If inflation remains elevated, any near-term reduction in rates is less likely.

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How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.

An Annual Ritual at the Gas Pump

You’re right if you have this nagging feeling that gas prices rise in the spring. As the graphic illustrates, on average prices rise through Memorial Day, plateau over the summer, and slip in the fall. This year is no exception, as prices echo the seasonal pattern.

Rate Cuts Still on the Table, Timing Less Certain

We often discuss the Federal Reserve and interest rates because both greatly impact investors. For starters, changes in interest rates have a significant impact on stock prices and income earned on savings. Sharply higher rates in 2022 pushed equities into a bear market.

Just Do It

That ubiquitous phrase from one of America’s most extensive athletic footwear and apparel makers seems to have been adopted by most American shoppers. The U.S. Census Bureau reported last week that retail sales jumped 0.7% in March, following a strong 0.9% rise in February.

The Road to Lower Inflation Takes a Detour

The rate of inflation is accelerating. That’s not how we hoped to start this week’s Insights. Take a moment and review Figure 1. The 4-month moving average has broken out of its long-term downward trend (red-dashed lines). On a monthly basis, prices bottomed in June and began to gradually turn higher. The upward trajectory picked up in January.