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Inflation Starting to Head in the Right Direction
The year over year report for the month of October was a 7.7% rise. This is down from an 8.3% rise in September.
We are finally starting to see the impact of some of the larger 75 basis point increases the Federal Reserve has made over the last few months.
The Fed may also now have the ability to make smaller rate cuts in the future to continue this trend. Then hopefully we will begin to see rate decreases as inflation stabilizes are the 2.5-3% target.
Inflation is Still High
Despite this progress inflation is still historically high. It is at levels not seen for 4 decades even given this progress.
It is important that you remember how to invest during times of high inflation. Read my post from a few weeks ago as a reminder. Also take a look at the picture below to recall the six steps of investing with high inflation.
While I think rate increases are still likely over the next few months, I also believe that there is an opportunity to capitalize on.
As the Fed continues to increase rates bond yields should rise. At some point the Fed will have to pivot from its current economic outlook.
As rates go down bond yields will as well. Meaning that those holding bonds at higher interest rate will be able to earn a premium on their investment if they were to sell.
If rates remain high but stabilize you can earn a yield almost double what you were able to earn in the bond market just a year ago.
What is Causing the Retreat in Inflation?
According to the most recent report there are many areas causing this cooling of prices.
Core goods prices are down considerably, led by vehicles sales, which registered a 2.4% drop from last month.
As the supply chain has stabilized so too have the prices of other major household purchases. Appliances and furniture have led the way in this regard.
The healthcare index is also down a rate in line with the 0.6% overall drop we saw in the entire economy.
One area still yet to come down is rents. They are still at all-time highs as many Americans are strapped with higher rent costs.
This will come down in time as leases end and new leases take their place at lower monthly payments than before. This will likely be one of the last dominoes to fall.
Don’t Jump the Gun
With all that said, celebrate this small win but realize there is still work to do.
I still want to see a sustained downward trend in inflation that progresses at an increasing rate.
Ideally, we will see inflation come December around 6.5% when the report comes out in January.
Come summer we need to be approaching the high end of the long-term target at 3%.
In the meantime, continue to monitor your portfolios. Stocks hit hard during the pandemic may become more attractive over the next year.
The bond market, as mentioned above, may be on pace to deliver better returns over the near term than the bond market. And even more importantly can contribute less risk to your portfolio.
So let us take a minute to enjoy the data today. But realize there is much more work to be done.
How are you preparing to invest as the Fed curbs inflation?