Chart Content: Measures of inflation and components of the consumer price index (CPI)
Chart Significance: U.S. consumer prices rose in March by the most in four decades. U.S. March headline consumer prices rose 1.2% month over month and 8.5% year over year. U.S. March core consumer prices rose 0.3% month over month and 6.5% year over year. The core reading strips out volatile food and energy prices. Increases in the indexes for energy and food were the largest contributors to headline inflation, with food adding 1.23% and energy adding 2.21% to CPI YoY.
Potential Forward-Looking Implications: March CPI readings represent what many economists expect to be the peak of the current inflationary period, capturing the impact of soaring food and energy prices after Russia’s invasion of Ukraine. Even so, we expect inflation to remain elevated throughout 2022 and into 2023. Equity market participation may prove a good hedge over this timeframe.
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Chart Content: Measures of sticky consumer price inflation verses flexible consumer price inflation
Chart Significance: The Federal Reserve Bank of Atlanta divides the consumer price index into two components: sticky prices and flexible prices. Sticky prices are those prices that are slow to respond to changing market conditions such as food, rent, education, and medical care. Flexible prices are those that respond more quickly to changing market conditions such as motor fuel, electricity, new and used vehicles, and lodging away from home. In terms of headline CPI, the Federal Reserve Bank of Atlanta judges that approximately 70% is composed of sticky price goods and 30% is composed of flexible price goods.
Potential Forward-Looking Implications: Because sticky prices are slow to change, it is reasonable to assume that the sticky price consumer price index reflects forward-looking expectations about future inflation to a greater degree than prices that change frequently. As of March, the sticky price CPI reflects a 4.7% YoY increase, giving us a good gauge for inflation expectations looking forward.
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Chart Content: Measures of consumer price inflation and unemployment in the United States
Chart Significance: As the Federal Reserve conducts monetary policy, it influences employment and inflation. The unemployment rate in the U.S. has been falling from a peak of 14.7% in April 2020 and currently stands at 3.6%. Meanwhile, headline inflation has been rising since it bottomed in May 2020 and currently sits at 8.5%, a four-decade high.
Potential Forward-Looking Implications: The U.S. economy has enjoyed the fastest job growth in almost four decades. Unfortunately, inflation-adjusted wages are falling. Over the past year, headline inflation ran at 8.5% while nominal wages grew only 5.6%, leading to a decline in real wages which may have a short-term neutral impact on spending expectations. In addition, the combination of low levels of unemployment and surging inflation are prompting the Federal Reserve to end their accommodative monetary stance. Fed officials raised interest rates by a quarter point at their March meeting and are setting expectations for future rate hikes throughout 2022 and 2023. Additionally, Fed officials will finalize plans to shrink their balance sheet in a process known as quantitative tightening at their May meeting. This environment creates volatility and downward pressure on traditional fixed income. We believe that equities and fixed income alternatives will fare better in this environment.
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Chart Content: Measures total returns in bond indexes over the past year
Chart Significance: High inflation and a hawkish Federal Reserve are creating strong headwinds for traditional fixed income returns, given the inverse relationship between interest rates and fixed income valuations.
Potential Forward-Looking Implications: To reiterate, we believe that equities and fixed income alternatives will fare better in this environment.
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Chart Content: A measure of one-year ahead inflation, earnings growth, and spending expectations among U.S. households
Chart Significance: One-year ahead inflation expectations among U.S. households rose to a new record high of 6.6% in March due to expectations for sustained higher food and energy prices. Meanwhile, consumers’ earnings growth expectations remain muted at 3%, implying that households do not anticipate wage growth to keep pace with inflation. Both figures tend to weigh on consumer sentiment. On a positive note, U.S. households expect to continue spending despite higher prices and contracting real wages. Year-ahead household spending growth expectations surged to a fresh high of 7.7% in March.
Potential Forward-Looking Implications: Strong and resilient consumption patterns should support corporate earnings and U.S. equity markets over the next year.
Investment Policy Committee - Credent Wealth Management
04/15/2022
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Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All other data, including returns, sourced from Bloomberg, through the release of monthly figures from the Department of Labor, U.S. Bureau of Labor Statistics, or from the Federal Reserve and any of its affiliated regional locations.