Hopes that we had seen “peak” inflation were dashed with today’s release of Consumer Prices for last month. The “street” had been hoping for a slight decline of 0.1%. Instead it got a “slight” increase of 0.1%. And in that misplaced decimal, the truth about inflation was revealed: It’s “sticky”!
The “core” inflation — a number the Fed watches closely — was expected to rise slightly, about 0.3%. Instead it surged 0.6%. And now that the market has decided to believe Fed Chairman Jerome Powell (remember the reaction to his speech a month ago when he promised to kill inflation even it it caused a recession and unemployment), the market followed up today’s report with a huge selloff.
Not only was the DJIA down nearly 1300 points, the NASDAQ plummeted. Every one of the NASDAQ 100 stocks is now down more than 28%. Tech led the way down and the big players desperately tried to raise cash before the end of the quarter in two weeks. That’s when their misguided long positions must be reported — an embarrassment if the market continues its decline.
Why Inflation Persists
There’s been a huge decline in oil prices, with crude still trading below $90 a barrel, and gasoline prices have declined on a daily basis for the past three months. But inflation is still baked in to the economy.
Previous high energy costs and reflected in transportation costs and fertilizer costs — all impacting grocery prices — as you’ve surely noticed.
Wages continue to rise as employers are still searching for workers — in both skilled and relatively unskilled positions. Restaurants can’t find servers, factories can’t find workers, and nurses are in short supply. Those willing to work demand higher wages. We are starting to see headlines about strikes.
And the housing component of the CPI continues to rise, as landlords raise rents — a “sticky” price increase that will impact pockets for years to come. Even as housing prices level off, amidst declining affordability because of higher rates, there is an inflation component in every sale.
It all adds up to persistent inflation. And the Fed is determined to stamp it out by raising interest rates and slowing the economy.
The Fed only has one big blunt tool to slow the economy: raising interest rates. And now expectations are increasing that the Fed will continue to raise rates higher and for longer. In fact, the market is saying that the short-term “fed funds” rate, now just over 2% will likely be pushed to over 4%.
The Fed will announce it’s next move when it meets again on September 21st. But the market is betting that won’t be the end of higher rates. And since the rate hikes hit the economy with a delay, the actions aren’t very precise. A recession is likely.
At the same time, you’ll hear talk of the “Fed balance sheet.” That’s the $9 trillion of IOUs — federal debt and mortgage debt — the Fed has purchased over the last decade, creating new money in the economy to pay for those debt purchases. Now, they’ll be reversing that process, sucking liquidity out of the financial markets. That, too, should push market rates higher.
What to Do?
If you’ve been reading my articles on a regular basis, none of this is surprising. We should be rooting for the Fed and hoping they don’t overshoot. But inflation is devastating to the poor and seniors on fixed incomes. at 7% inflation, the buying power of your dollar is cut in half in just 10 years!
At least, with rising rates, your “chicken money” (money in the bank or MM funds) will start to earn more — even though it won’t keep up with inflation. But it will let you sleep at night!
And, history says we will get through this and resume America’s growth pattern. So don’t toss out your stocks — especially if you have more than 10 years to go until retirement. You will still need some stock market exposure even IN retirement — as historically, stocks have outperformed inflation over every 20 year period.
Self-discipline is the essence of all decision-making. That’s a Savage Truth. So don’t hide from your portfolio. Know what you own, and expect that stocks could fall farther. But if you aren’t selling until the years after you retire, this should not give you reason to panic. And if you’re still working and contributing, your monthly contribution to your retirement plan will buy more shares at lower prices!
Trying to “time” the market is only for fools or TV pundits. Make sure you have a good strategy, then stick with your plan. In the long run, you’ll be glad you did. And that’s the Savage Truth.