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Market Commentary: The Latest on Inflation and Interest Rates

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Clint Carpenter:

Hi there. I'm Clint Carpenter. I'm an investment advisor here at Eckman Wealth Management. I'm joined by my good colleague Kris Venezia, also an investment advisor here, and we thought we'd just talk about inflation today. You know, it's this kind of sticky problem that we've had here domestically, so we'll kind of focus on that first. But it is showing some signs of slowing down, or at least, you know, that that precipitous rate of inflation is easing somewhat.

We just got some fresh data yesterday, CPI numbers coming out. That's our main gauge of inflation. So, Kris, why don't you start us off? What was in that report? What does it mean? What's the trend been?

Kris Venezia:

Yeah, so just looking at CPI, which came out yesterday, certainly inflation is still on the top of everyone's mind. Things came in just about as expected; both on like the headline inflation number, which is 3.2%, and then what the Fed likes to look at called, "Core" came slightly below what was expected. It was 4.7% on a 4.8% expected. Core looks at shelter more probably food energy more intensely on the Core side of things.

The biggest thing we saw in here and the reason why went from 3% in the last report to 3.2%, is an acceleration, a little bit, on food and energy than what we had seen. So energy started to pick up a little bit, food started to pick up a little bit. The biggest part of inflation right now in these reports is shelter makes up like 90% of the increase in the inflation number. There was a big report this week out that shelter in the inflation report lags real world shelter numbers that we think of. The reason for that being: the way it's calculated by the Bureau of Labor Statistics. They rely pretty heavily on the rent side of things. That has lagged because when people are getting and signing rents, it's not like every month your rent changes. Right, you sign a lease and then a year later you sign a new lease.

So, the expectation in a report from the Fed in San Francisco this week is that we should see shelter inflation start to lower that CPI number, come down later this year, and then really once you get into spring of next year, the expectation is that we'll start to pull the inflation number down. It's the largest component of these inflation metrics.

The biggest thing overall: what does it mean? The trend is still intact that we're seeing, which is inflation, you know, descending. I know it went from 3% to 3.2%, but overall, when you look at what's in there, you're still seeing this deceleration trend continue in inflation, which is certainly what the Federal Reserve is looking for. The biggest concern, looking forward and expand on this in a global sense is what we're seeing on the commodity side.

So energy and food especially, we're starting to see that pick up in the U.S. and abroad. It's a global phenomenon and that's going to, you know, the expectation is the next inflation report we're going to get is going to have a higher CPI number, higher acceleration month over month, driven by some of what we're seeing in energy and food. Clint, I'll turn to you to kind of talk about globally, what are the impacts of that global inflation outside of the U.S. and how that influences everything.

Clint:

Yeah, inflation definitely hasn't just been a domestic issue, it's global. The trend line has followed the U.S. somewhat, in certain areas. You know, parts of Asia have seen CPI levels or comparable metrics of inflation in their countries, you know, drop to similar rates around 3%. So, you know, places in Asia like Japan, South Korea, Malaysia, Indonesia, they're seeing inflation ease as well.

But in places like Europe, you know, it's tough. It's really sticky there. It remains just stubbornly high in places like the UK, number one, who has really been squeezed by higher energy costs, food costs, other sort of implications from the conflict between Ukraine and Russia really driving prices up. There's a lot there, basically.

So, places like France, Germany, Italy, the U.K. still really battling inflation, not really attacking it as well as some of their counterparts like the United States or, you know, some of these Asian countries that have different sort of trade agreements and things in place. It's been a little surprising that the U.S. has combated inflation as well as we have so far. That's kind of been the the trend that I've been watching the most.

So, not just a domestic problem by any means. The whole world is facing inflation. It's tough. But the trends are mostly moving in the right direction. So inflation, obviously, that's a big enough impact by itself. You know, things cost more - that affects all of us. That's rough. But what would you say are some of the other implications of inflation?

Kris:

Yeah, I think, you know, the implications of inflation or the impact it has on the rate side of things. On the back end, we've seen rates pick up, not necessarily because we've just seen some of this commodity inflation, but there's been other factors as well that have, you know, a ten year in the U.S. or 30 year in the U.S., both four, four plus, staying above four, which was the challenge earlier this year.

The ten year just has such an impact on mortgage rates and auto loan, it just really sets up that barometer for influencing those rates. So certainly, the rate side of things is impacted by inflation. I think what I would say overall, if I wanted like a summary for if you're watching what's going on, the easiest way to think about everything, is we're still in a really fragile spot in the global economy.

Clint was kind of basically saying that like the UK and everything. But the example I give this week is there's threats of a strike in Australia with natural gas workers that sent European natural gas prices skyrocketing. UPS workers signed this big union deal. What does that mean for FedEx and Amazon workers, not union, but does it put pressure on them to wage, raise their own wages to get labor? Auto workers in the U.S., you know, threatening strike - big labor demands, pilot unions, even actors, writers. So you have this pressure right now that's building. Because everything is so fragile right now in the global economy, really even things that, you know, pre-2020 wouldn't have had as big of an impact are having a big impact because we're still in this fragile situation.

Supply chains are starting to get better, but still fragile. So just these things that pop up have really big impacts. I think that's why, you know, when you look at August and some of the weakness we've had in the market, I think it's just that that realization had a couple of months where the ball really bounced in the right direction. But we've had some stuff late July, early August that kind of brought back to investor’s minds that, you know, inflation is still above where you want it to be. The economy is still in a fragile spot and rates are high.

We're not going to know outside of what we've seen in housing and finances, those parts of the economy that are really very sensitive, outside of that we still haven't seen a huge impact on rates. When small, mid-sized companies, governments... have to go and get financing, it's not going to be what it was two, three, four, five, six, seven, ten years ago. Financing is a lot more expensive, so there's still a lot of, I think, jitteriness that the market is having to digest right now. And that's kind of what you're seeing in the market is a pause here to say, hey, things have gone all right this year, better than expected I'll say this year, but there's still some challenges.

Clint:

Yeah, it's a good reminder. I mean, a pleasantly improving economic condition doesn't always just kind of work on a straight line. It definitely ebbs and flows. And from the portfolio management side, that's always in the back of our mind. You know, we're not just rushing into a market that's soaring up because we're looking for what's out there that could take it down. Remaining in that kind of cautious position is wise.

But, we don't ignore the good news either. You know, there's there's reasons to have faith in the US economy and the stock market and even some global investments. So maybe that's a future topic is more on the portfolio management side, where our future opportunities are when we kind of get past some of this, as you said, you know, jitteriness. So we'll think about that.

I think this is good for today. Inflation- maybe you're sick of hearing about it or maybe this is really interesting. You know, it's been something that has kind of dominated the headlines for the last really two years at this point. So we'll keep bringing you updates, but certainly reach out to us with any questions that you've got.

We like kind of leading you through the headlines, but I would say a lot of times some of our best advice comes from those specific questions and circumstances that clients have, you know, that real people are dealing with. So we're always happy to answer those too. Maybe a good Q&A episode would be in our near future here. But thanks for listening or watching or reading, however you're consuming our little content here and we'll catch you next time.