By Tim Courtney, Chief Investment Officer
After months of surging inflation, July brought a sliver of hope: the Consumer Price Index (CPI) rose to 8.5% over the last year, lower than the 8.9% expected and down from 9.1% in June.1 Investors had been hoping for the fever to break, and the markets were quick to respond with the S&P 500 rising to a three-month high and the Nasdaq continuing a move higher, up 20% compared to its June low, after the release of the CPI data.2 While the markets cheered, there is still a long way to go before we can say that inflation is behind us.
Interest rates. The main reason markets rallied following the CPI data is the anticipated impact on interest rate hikes. The Federal Reserve (Fed) started raising rates to stave off inflation, instituting four rate hikes since March and most recently, two consecutive 75 basis point increases. The market was expecting September’s Fed meeting would result in a third 75 basis point hike, but after the CPI data it could be a smaller, 50 basis point increase instead. That’s positive news for interest-sensitive assets, which saw a bump after the release.3
The dollar. As we previously discussed, the dollar saw a surge amid rising interest rates, with investors viewing it a source of safety, stability and higher yields during volatile times.4 So while markets celebrated cooling inflation, the dollar did see a dip, down 1.29% on August 10, immediately after the CPI data release.5 However the dollar has since regained its footing and is now trading near highs for the year.
What’s next? Although the CPI coming off its peak is a positive indicator, 8.5% inflation is a far cry from the Fed’s 2% goal, and the CPI will almost certainly remain elevated for several quarters. There is still a lot of pressure on inflation coming from wage increases, labor shortages and housing prices, some of which hasn’t fully made its way into the CPI number yet.6 When the Fed meets in September to determine the next rate increase, the July CPI will just be one consideration, along with August CPI data and the latest job numbers.
Our base case is that inflation won’t stay at these elevated levels and the latest CPI data is a step in the right direction. Many risks remain though, and we shouldn’t assume that inflation will disappear over the next year and we’ll be back to business as usual. If you have questions about how the inflation is impacting your portfolio, please contact your Exencial Advisor.
- CNBC (8/11/22) — Consumer prices rose 8.5% in July, less than expected as inflation pressures ease a bit
- Bloomberg (8/11/22) — Market surge after US inflation data has skeptics warning it’s overdone
- Bloomberg (8/17/22) — Fed saw smaller hikes ahead to assess prior moves, minutes show
- The New York Times (7/16/22) —The dollar is extremely strong, pushing down the world
- CNBC (8/10/22) — Dollar tumbles after cooler-than-expected U.S. inflation data
- Reuters (8/17/22) — Fed minutes show more rate hikes in the pipeline, but pace could slow
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