Our Thoughts on The State of Inflation

What We Know?

  • One of the biggest stories of this year when it comes to the United States economy is inflation
  • This week the Consumer Price Index showed a report of a 9.1% year over year increase in inflation, the highest we have seen in over 4 decades
  • However the economy has continued to hold strong despite the persistent inflation and record low sentiment in the markets
  • Unemployment has remained at a low 3.6% as many companies are continuing to grow and beat earnings.
  • Out of the 6% of the S&P 500’s market capitalization that have reported earnings this quarter, the aggregate earnings per share (excluding financials) have beaten the estimate by about 3.3% according to Credit Suisse

Covid and Ukraine Exacerbating Supply Chain Issues

  • Covid lockdowns in China in the past several months has slowed down the manufacturing of certain goods
  • The war in Ukraine has also played a major role in harming supply chains.
  • We have seen the United States and other countries around the world place sanctions on Russia and commit to steering away from buying oil from Russia.
  • This has caused Oil prices to rise significantly not only hurting supply chain issues but hurting your wallets at the gas stations.
  • After hitting $120 per barrel in early June, oil has returned to under $100 a barrel for the first time since early April.
  • Oil has a large effect on inflation, both directly and indirectly as high gas prices result in high production and transportation costs. Lower oil prices are a good sign for inflation numbers moving forward.

Economic Cycles Take Time to Settle In

  • While it is easy to assume these rate hikes have not done their job, it is important to note that there is a lag between the moment interest rates are raised and the time it takes to truly effect the economy.
  • The raises tend to have a lag time of a few weeks to a few months where the economy "catches up" to the rise in rates.
  • While inflation seems out of control, it is important to remember the Federal Reserve’s prior rate hikes are continuing to make their way through the economy.
  • Below is a chart from 2016-2018 illustrating how borrowing and savings rates drift up over time with the Federal Reserve hikes instead of mirroring the step like pattern.

The News Driving Emotion and Creating Volatility

  • With the "bad" news of rising inflation and costs displayed everywhere it is hard to see past it. However the peak of inflation is likely to come soon.
  • Although the news is important, it is also very important to see how much has actually been impacted for you and ask yourself some questions
    • Have you had to adjust any of your goals or future retirement plans because of the market?
    • Are you thinking with a long-term mindset or just focused on the short term news that is catching your attention?
    • It is extremely important to take out emotions and think rationally during this times of uncertainty. That is why strategies like "dollar cost averaging" are so important because it is nearly impossible to time the market.
  • While there is a lot of uncertainty moving forward, we think it is important to stay informed, stay vigilant, and look for the opportunities that emerge.

Thank you for reading and feel free to contact us if you have any questions!

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