The Last Mile Is the Hardest: Inflation and Market Reaction

The last mile is always the toughest. This holds true whether one is running a marathon or trying to control inflation.

Surprisingly, the market’s response to Wednesday’s inflation report suggests otherwise. The consumer price index (CPI) only rose by 3% over the past year, marking the smallest increase since March 2021. Despite this, the Dow Jones Industrial Average recorded a 2.3% gain this week, while the S&P 500 saw a 2.4% increase, and the Nasdaq Composite experienced a significant 3.3% jump. Furthermore, the two-year Treasury yield dropped to 4.7% after briefly surpassing 5% the previous week.

It is important to acknowledge how far we have come in dealing with annual inflation. Just a year ago, in June 2022, inflation reached its peak at a staggering 9.1%, with prices increasing across almost all categories of the CPI. However, today, we are seeing a decline largely influenced by energy prices, which have dropped by nearly 17% compared to the previous year. Additionally, prices for used cars and trucks have fallen by 5.2%, along with decreases in airline fares, appliances, health insurance, and footwear.

Nevertheless, it is crucial to understand that this decline can be attributed to inflation catching up with some abnormally high months. For instance, in June 2022 alone, the CPI surged by 1.2%. Comparatively, June 2023 only saw a modest month-over-month increase of 0.2%, resulting in a significant reduction in the annual change by one percentage point.

In conclusion, the recent market reaction may suggest an underestimation of the challenges that lie ahead in tackling inflation effectively. While current figures show promise, it is important to remain vigilant and proactive to ensure a sustained and controlled inflation rate.

Inflation on the Rise

The Consumer Price Index (CPI) remained stable in July 2022, indicating a potential increase in the annual change in the index if inflation surpasses zero in the coming month. According to Bianco Research, if monthly inflation maintains its pre-pandemic, quantitative-easing-era average in the second half of 2023, the annual change in the CPI could reach 3.9% by December. This upward trend may give the impression that inflation is gaining momentum once again.

Challenges Ahead for Inflation Targets

Attaining 2% inflation will likely prove more challenging, posing a potential challenge for financial markets. As Gregory Daco, chief economist at EY-Parthenon, notes, the benefits of rapidly declining energy prices, cooling food price inflation, and easing core goods inflation have largely been exhausted. Any further reduction in inflationary pressure will depend on slower month-over-month increases in core services prices.

Loosening the Labor Market

Many economists believe that the next phase of disinflation will require addressing the tightness in the U.S. labor market. Achieving this may necessitate a weaker overall economy, which could test the Federal Reserve’s commitment to maintaining its current course and have implications for stock prices.

Implications for Federal Reserve

The Federal Reserve’s rate-setting committee is scheduled to meet on July 25-26, and there is a prevailing expectation in the futures market of a quarter-point increase in the federal-funds rate. However, there will be two more months of inflation and employment data available before the subsequent meeting on Sept. 19-20. Presently, future market pricing suggests that there will be no change in interest rates.

Progress vs Victory

As we move forward in our journey, it is important to acknowledge the difference between progress and victory. The Federal Reserve understands this distinction well.

Progress is undoubtedly a positive development. It signifies movement in the right direction, steps taken towards our goals. However, progress alone does not necessarily lead to victory. Victory is a definitive achievement, a culmination of efforts resulting in success.

The Federal Reserve, with their expertise and experience, recognizes that progress should not be mistaken for victory. They understand that while progress is encouraging, it is crucial to stay focused and persistent in pursuit of true victory.

In conclusion, let us celebrate progress as an essential stepping stone towards victory. By recognizing this distinction and maintaining unwavering determination, we can strive for true success in all our endeavors.

Remember, progress is important, but it is not the ultimate destination. Victory awaits those who persevere and remain dedicated to their objectives.

Stay motivated, stay determined, and victory will be within reach.