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Inflation Remains High, Markets Looking Forward

October 14, 2022

Last Week in Review: Inflation Remains High, Markets Looking Forward

This past week, we witnessed the highest consumer inflation reading in 40 years and the markets responded. Let's walk through what happened and investigate the week ahead.

Consumer Prices Still Rising

On Thursday, the Personal Consumption Index (CPI) was reported at 8.2%, which was higher than expectations. What is of bigger concern is the month over month rate of inflation was reported at 0.4%...double expectations of 0.2%. The monthly increase is what the Federal Reserve watches closely to see if inflation is peaking.

Shelter makes up 40% of consumer inflation and that component rose 6.6% year over year. For inflation to come down to the Fed's target of 2%, we will need to see rents come down and this will take some time.

Here's what we learned with the high inflation reading. First, the Federal Reserve is now very likely to increase the Fed Funds Rate by .75%. It also means they will continue to talk tough and maintain a position of higher for longer for rates.

The Market Reaction

It's a good time to be reminded that the Fed only controls the Fed Funds Rates, which is a short-term, overnight rate. Long-term rates, like the 10-yr Note will only go up IF the economy can absorb the higher rates. Despite rates spiking in response to the inflation numbers, the 10-yr Note yield was stopped at 4%. This is because the markets are forward looking and sensing slower economic conditions ahead will lower inflation.

Fed Rate Hike Impact

Another reason long-term rates may be approaching their peak is to consider why the Fed is hiking rates to begin with. The Fed is hiking rates to lower inflation, slow demand, create unemployment and lower asset prices. All these things are beneficial to long-term rates.

Looking Ahead

The economic calendar is lean here at home with just housing on the docket. There will be plenty of Fed speak and central bank activity around the globe to track as well as corporate earnings being reported.


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