The Firm Update – Inflation Part 2

On November 15, 2021, our associate, Derek Landis, CFP®, wrote a newsletter regarding the onset of inflation in the U.S.  At that point in time, the most recent CPI (Consumer Price Index) figure was a 6.2% year-over-year increase from October 2020 to October 2021.  Approximately eight months later, the CPI reading surged to its peak at 9.1% in June of 2022 (see chart above(1)).  This staggering number sent shock waves throughout the U.S. economy, as a hawkish Federal Reserve continued its efforts of quantitative tightening.  As the Fed raises interest rates, and bond prices fall, their goal of attaining a 2% inflation target remains.  More recently, the CPI number as of June 2023 depicts a positive downward trend.  The aggressive actions from Federal Reserve Chairman, Jerome Powell, since last Summer, has had a beneficial effect on inflation, as prices increased 3% year-over-year from June 2022 to June 2023.  While the June 2023 CPI 3% inflation figure is much closer to the Fed’s target of 2%, the Fed is not finished with their interest rate hiking campaign.  At the time of this writing, it’s almost a foregone conclusion that there will be another rate hike at the end of July.  However, when the Fed meets again in September, they may pause raising rates, but nothing is inscribed in stone.  The Federal Reserve’s future decisions will be data driven, as they monitor inflation.

The Federal Reserve will monitor the Consumer Price Index to determine the rate of change in inflation, but they prefer to take a closer look at core inflation figures.  Core inflation measures the change in costs of goods and services excluding the costs of food and energy.  Food and energy costs are not included because these prices are more volatile and can excessively skew inflation readings.  Food and energy expenses are viewed as staples, meaning that as prices increase, the demand for food and energy does not change.  Removing these sectors from the calculation yields core inflation, which the Fed believes is a more accurate portrayal of inflation within our economic system.  The most recent year-over-year core inflation figure is 4.8% as of June 2023.  Again, this is more than twice the Fed’s goal of 2%.  We can expect to see interest rates at current or higher levels until core inflation decreases further.

In 2022, the Federal Reserve’s actions not only impacted inflation, but their actions dramatically halted the growth of the domestic stock and bond markets.  We noted in our recent performance letter that last year, in 2022, the Bloomberg Barclays US Aggregate Bond Index, had its worst performance since its inception in 1972.  Further, the tech-heavy Nasdaq and the S&P 500 suffered their worst performance year since the Great Recession of 2008.  These results were heavily influenced by the decisions of the Federal Reserve as they set the brakes on an economy in a red-hot inflationary environment. Regardless of whether one believes Federal Reserve intervention is necessary, their decisions, including their rhetoric around their decision making, has a direct impact.

So, where do we go from here?  The Normandy Team is always ready to help with your financial planning needs.  Please reach out to us to schedule a review of your plan and financial goals.  Remember, it is always important to update us with any major life changes.  We are here to be of service.  Thank you for your continued confidence and trust over the years.

Best regards,

Charley Partheymuller, CFP®




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