Mitch's Mailbox

June 28th, 2024

What Easing Inflation Really Means

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Briar C. from Morgantown, WV asks: Hi Mitch, inflation is still a top issue in the U.S. economy today. Are there signs that prices are coming down anywhere? Or should we expect these higher prices to be the new normal? Thank you.

Mitch’s Response:

Thanks for sending your question, Briar. To answer your question, I think it’s important first to make a distinction between “disinflation” and “deflation,” which are two very different things.

Disinflation is what the Federal Reserve wants to see today, and it’s arguably what the economy needs to arrive in a ‘soft landing’/goldilocks state. By definition, disinflation means prices are still growing month-over-month and year-over-year, it’s just happening at a slower pace than previous months and years.1

In May, for instance, the U.S. Labor Department reported that CPI rose 3.3% year-over-year, an improvement from April’s 3.4% print. On a month-over-month basis, prices rose 0.2% in May, which was the lowest monthly reading since July 2023. That’s disinflation, and it’s what the Fed and the markets wanted to see following a hot Q1 2024 for prices.

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May’s CPI report also showed other signs of improvement in the inflation picture. The CPI report looks at dozens of different categories of spending and prices, and we saw the breadth of rising prices get narrower. Across the CPI, 47% of components were rising at a pace below 4% year-over-year, which was an improvement from 41% in April.

With this understanding of disinflation, the answer to the second part of your question is yes—you should expect prices at current levels to be the ‘new normal.’ Prices across the economy have reset to higher levels, and in the future, we want to see prices continue moving higher, albeit at a modest 2% to 3% annual pace. Modest inflation can be viewed as good for the economy, as it promotes spending growth, wage growth, and investment.

Deflation, on the other hand, is very different. That’s when prices are falling from period to period, which can be a sign of trouble in the economy. If consumers expect prices to come down in the future, they may choose to spend less today—which means sapping the main engine of the U.S. economy. If consumers are spending less, corporations may respond by slowing production, laying off workers, investing less, reducing wages, etc. That’s not what we want to see.

There were signs of deflation in the latest CPI report, with the “supercore services index”—which excludes shelter prices—falling slightly from April. This was the first time that’s occurred in over two years. This is just one data point, however, and there are few signs that deflation is taking hold anywhere.

On a high level, I think we’re getting closer and closer to a time when inflation settles back near the Fed’s target, which again means that prices will keep rising from where they are now—just at a slower overall pace.

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• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
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• Can volatility actually be an opportunity?

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Disclosure

1 Financial Advisor. June 12, 2024. https://www.fa-mag.com/news/disinflation-is-happening-in-all-the-right-places-78452.html?section=68

2 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.


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This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

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