The U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) for August and reported higher than expected inflation. Headline inflation rose 8.3% year over year, while Core CPI (ex-food and energy) increased 6.3%. Month over month numbers also increased .1% and .6% respectively. Relief came from the energy sector as gasoline prices came down 10.6% from July, continuing their downward national trend from more than $5 per gallon earlier in the summer to the current average of approximately $3.71 per gallon. However, grocery and food prices remained elevated, as well as the all-important shelter and housing rental sector which contributes approximately one-third of the headline CPI index.
Markets reacted negatively to the news as risk assets, including the S&P 500 index, sold off and Treasury yields moved higher. The next Federal Reserve policy meeting is scheduled for September 20-21 and futures markets are handicapping another .75% interest rate hike to help fight off future inflationary pressures.
The ultimate destination for the Fed and its short-term policy rate is 4%. This implies another 175 basis points or 1.75% of future Fed tightening. The Fed meets three more times in 2022 (September 20-21, November 1-2, and December 13-14). While the steps to obtain a 4% restrictive policy rate over these next three meetings will capture many headlines, the ultimate Fed destination is most important.
As the Fed eventually achieves its policy mandate of price stability, we anticipate market volatility to remain elevated. Our U.S. GDP growth forecast is modest as the Fed continues its restrictive tightening policy; however, labor markets and consumer balance sheets remain healthy. We favor domestic equities over international, and continue to pursue a disciplined, fundamental, and research-driven investment process, overweighting high-quality individual operating companies with strong cash flows and balance sheets. Our fixed income portfolios favor short to intermediate maturities, high-yield, and investment-grade corporate bonds, that provide predictable cash flow, fixed maturities, and attractive risk/return profiles.
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Diversification may not protect against market risk or loss of principal. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Actual investor results may vary.
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