Updates on Inflation
The highly anticipated inflation report was released this morning. The May Consumer Price Index (CPI) rose 8.6% year over year. For context, this marks the highest CPI increase in over four decades going back to 1981. Inflation continues to surprise to the upside and topped consensus estimates of 8.3%. Shelter, transportation, and food costs continue to be the main drivers of the surge in prices and account for 87% of the incremental acceleration in CPI. Food at home prices continue to rise and the category is up close to 12% from this time last year. Shelter, the largest contributor to CPI, is also accelerating and will not likely peak for another 3 or 4 months.
Meanwhile, headline average hourly earnings are growing at a healthy 5% rate; however, with inflation north of 8%, we are experiencing negative real income growth. In other words, consumers are losing more and more purchasing power each month. As you can see in the first chart below, the trend is worsening going back to October of 2021. This squeeze on consumers is not only leading to a slowdown in discretionary spending but also, for many Americans, having a major impact on their ability to afford household essentials.
The latest round of data should cement the Fed’s hawkish policy stance. For those hoping that the policy leaders may be able to pause the rate increases after the additional 0.50% hikes in June and July, this seems increasingly unlikely. The second chart below shows that expectations for additional rate hikes have again moved higher, up to 8.37 more hikes. Investors are now speculating that a 0.75% rate hike could even be on the table at some point this year, which hasn’t happened since 1994.
The broad US markets are down over 2% today on the news, and data continues to support the “Don’t Fight the Fed” mantra. Meaning – portfolios should be aligned with Fed policy, which for now dictates very defensive positioning. In Vista portfolios, expect to see continued allocations to inverse (short) positions and an overweight to cash/ultrashort-term bonds to help hedge against these sharp declines.
As always, feel free to reach out to us with any questions.
Lincoln Sorensen, Family Wealth Advisor & Co-Founder