Apr 16, 2024

The Road to Lower Inflation Takes a Detour

Weekly Market Commentary

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.

But, what about the so-called calendar effect? Wasn’t the bump in January and February tied to the new year? Well, apparently not.

The Consumer Price Index rose 0.4% in March. It’s up 3.5% versus one year ago. In February, it was up 3.2%.

The core rate, which excludes food and energy, rose 0.4%. It’s up 3.8% year-over-year, the same as February—see Figure 2.

Inflation has slowed dramatically on an annual basis. That is important to acknowledge. But price hikes remain elevated. Using the year-over-year rates as our yardstick, progress toward price stability (defined by the Federal Reserve as 2% annually) has stalled.

Let’s review another metric. The 3-month annualized rate can be noisier and more volatile, but it can detect new trends faster than the year-over-year rate. Like the monthly core CPI, it has also turned higher, bottoming out at 2.64% in August and rising to 4.53% in March. It has risen in six of the last seven months.

What’s happening? U.S. BLS data highlight that the price of consumer goods, excluding food and energy, are declining—yes, that’s right, declining. Goods are in a slight deflationary trend (Figure 4). But services are much higher and are showing signs of accelerating.

At best, the road to lower inflation isn’t hitting bumps; it’s taken an unexpected detour. At worst, inflation is moving higher, and we’re repeating the mistakes of the 1960s and 1970s. Or will inflation get stuck in the current range, denying the Fed the ability to start cutting rates?

Following the runup in stocks, some volatility shouldn’t be discounted. The latest CPI report is forcing a shift in sentiment on rate cuts, which is creating short-term volatility.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at info@fdpwm.com or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

RELATED POSTS

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.

No Matter How You Slice It and Dice It…

The latest employment numbers from the U.S. Bureau of Labor Statistics (BLS) point to a robust job market. On Friday, the U.S. BLS reported that nonfarm payrolls rose 303,000 in March, well ahead of expectations. It’s not simply March; growth has been above 250,000 for four months running.

Last Year’s Rally Spills into 2024

Stocks turned in a surprisingly strong 2023, and momentum has yet to slow in 2024 as last year’s rally remains in high gear. According to Dow Jones Market Data published by MarketWatch, the S&P 500 Index set 22 all-time closing highs this year. Likewise, the Dow notched 17 closing records, and the Nasdaq Composite recorded four new closing highs.