Anxious Investors Wonder, Has Inflation Peaked?

On August 8th, the Bureau of Labor Statistics reported that the July Consumer Price Index (CPI) came in lower than expected at 8.5%. The CPI is a measurement of the overall inflation in the economy and one of the key figures that the Federal Reserve uses when determining future interest rates. Early this year, the Fed indicated that it would increase interest rates throughout 2022 in an effort to cool down a hot US economy. Higher rates increase borrowing costs and curb consumption, especially for big ticket items such as homes.

Many economists were expecting the CPI to be 9.1% for the month of July, and the surprise lower figure caused many investors to weigh the odds that inflation may have peaked, which would cause the Fed to reconsider future rate increases.

The prospect of higher interest rates throughout the year rates caused investors to revalue stocks and led to a general fear that the Fed would increase rates too much and thus push the US into a recession. Such concerns were a major reason for stocks to sell off throughout 2022.

A breakdown of the CPI shows that the food index rose 1.1% from June, while a 11% decline in fuel oil helped cool the overall CPI. Prices for shelter, medical care, motor vehicle insurance, household furnishings and operations, new vehicles and recreation all increased in July, while air fares, used cars and trucks, communication and apparel declined. In fact, the cost of shelter has remained stubbornly high, contributing 40% to the increase in core CPI.

The possibility that inflation may not be as bad as once thought has led to a stock market rally, as market forecasters now expect that the Fed policy would not need to be as aggressive. The CME FedWatch tool puts a 66.5% probability of a 50-bp hike at the next Fed meeting and 33.5% chance of 75-bp increase. Before the CPI data was announced, the probabilities were 32% for a 50-bp hike and 68% for 75 bp.

The next Federal Reserve meeting on interest rates will be on September 21. Until that time, investors will be anxiously waiting.

Please note that all of the material provided in these postings are informational and subject to change. Nothing provided should be used as investment advice or should be used as a basis for any investment decisions.