Making Sense of October 13, 2022 Inflation Numbers

Thursday was a strange day in the stock markets. After the initial inflation numbers were released, all the major indices quickly fell.  The Dow Jones Industrial Average dropped almost 1.9%. But a rebound quickly began and by the close of trading at 4:00pm, the DJIA ended up 800 points – it was a swing from bottom to top of almost 7%. Looking deeper into the numbers, here are a few takeaways:

Negatives:

The fuel oil and natural gas we will all need in the next four months are up 58% and 33% respectively over the past year. It’s going to be an expensive winter, and for those of us in the northeast who have electricity generated by natural gas, electric rates are up significantly as well.

Inflation of food prices has accelerated. Prices have risen by 5% over the past six months, and for those of us who shop around the perimeter of the grocery store (produce, meat and fish, dairy), it has been even worse. With winter coming, this may continue to become a bigger problem, especially if developing nations are unable to afford the food necessary to feed their people.

Positives:

Gasoline prices continue to moderate. They’re down another 5% last month after dropping 10% in the previous month. There are a few places locally with gas under $3.20 per gallon (for those locations, click here) though prices in California still hover around $5.

Used cars and trucks – the hottest category during covid – have lost value in 5 of the past 7 months. Finally, some good news for those of us with an older car that will need to be replaced soon.

The two graphs below show inflation numbers for the past 24 months. Through this time, inflation rates have been consistently higher than they were pre-pandemic. In the past three months, the numbers have started to come down. Since June, there has not been a month where inflation was higher than it was in the corresponding month a year earlier.


Overall, inflation rose by only 0.5% in the past quarter compared to 1.2% in the same quarter in 2021.
 

   

So, what happens from here? A few thoughts moving forward.

In the 1980’s, Ronald Reagan’s administration used an economic policy called “Trickle-down Economics”. In essence, by making companies more profitable, they expected those profits to trickle down into the pockets of workers and investors. Though not perfect, some of those policies are responsible for wealth generated over the past 40 years.

Like Reagan’s economic policy, the Fed’s interest rate policies have to trickle down to impact inflation. The Fed’s interest rate policy affects how people and companies borrow/invest/lend money and that, in turn, affects inflation. So far, the Fed’s policy has mitigated last year’s rampant speculation based on the losses in cryptocurrency and high-risk technology companies, but has trickled down to inflation?

Over the past 100 years, inflation has averaged 3.8% per year. At that rate, prices of goods and services double every 19 years or so – basically once a generation. In contrast, from 2010-2020, inflation averaged just 2.3%. Most of us have become used to low inflation rates, but that’s not been the norm over the past century. Many disciplines have a concept of mean reversion -- I suspect we’ll move closer to that norm. As Twain said, if history doesn’t repeat itself, it usually rhymes.

The Fed meets next month on November 2nd. The bond market tries to predict what the Fed will do next month. Currently it expects a 70% chance of a 0.75% increase. We will continue to monitor the inflation and interest rate numbers and see how closely the market was able to predict the future increase.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.  All indices are unmanaged and investors cannot invest directly into an index. 

Charts sourced from US Dept of Labor: Bureau of Labor Statistics News release