Barbara J. from Oxford, MS asks: Hello Mitch, I read in a few different places that the September inflation numbers were higher than expected. Do you see this as a potential sign that the Federal Reserve acted prematurely, and do you think it could be volatile for the stock market? I am certainly not feeling any signs of improving inflation in my pocketbook. Thank you.
Mitch’s Response:
Thank you for emailing, Barbara. Let’s first cover the September inflation report and then I’ll dive into comments about the Federal Reserve and markets.
In your question, I believe you’re referring to the September consumer price index (CPI), which showed headline inflation ticking slightly lower from 2.5% year-over-year in August to 2.4% in September. The ‘higher-than-expected’ part of the report you’re referring to is for Core prices, which accelerated by 0.1% in September to 3.3% year-over-year. Both readings were slightly worse than the market was expecting.1
The inflation metric the Fed watches more closely, the headline personal consumption expenditures (PCE) price index, registered at 2.2% year-over-year in August, a solid improvement from July’s 2.5% rate. We won’t see September PCE inflation data until October 31.
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Looking at these two sets of inflation data together, I don’t see much cause for concern, and I certainly do not think the data presents anything new for markets. Equity markets, in my view, have likely moved past the inflation story at this stage and are more focused on economic growth and earnings.
Unless we see a sudden and dramatic re-acceleration in inflation – which we’re not anticipating – the Fed should be able to continue along a path of moderate rate cuts at least for the balance of the year. From a historical perspective, the average annual CPI inflation rate is approximately 3%, which puts current inflation well within norms – even if it is slightly higher than the Fed’s 2% target.
As far as still feeling inflation as a pocketbook issue, it’s important to remember that inflation is a measure of the rate of change in consumer prices. In other words, the CPI and other inflation data do not tell us about where prices are, but rather at what rate they’re changing. Apart from food and energy prices—which are volatile over time—we do not necessarily want to see prices declining. That’s deflation, and it’s typically a sign of economic weakness. Consider that slightly rising prices over time are what motivate businesses to keep producing more goods and supplying more services, so some level of inflation is actually healthy for a growing economy.
What we don’t want to see is inflation rising faster than wages over time, which was what was so painful about 2022. It’s also why consumers are still frustrated with prices overall. The good news is that cost-of-living-adjustments in Social Security Retirement Benefits are designed to keep pace with inflation, and wages have been rising faster than inflation in the past couple of years. It will take some time for some consumers to feel like their purchasing power has returned to pre-pandemic levels, and I understand that the pain of inflation is still being felt. But if the economy continues on a healthy path of growth from here, while inflation remains modest, I believe that ‘normalcy’ will return in time.
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