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Inflation Cruises to a 40-Year High:  The FED is on the Ropes

Inflation Cruises to a 40-Year High: The FED is on the Ropes

June 10, 2022

The CPI inflation rate reported this morning rose for yet another consecutive month in May by a full 1% taking the headline number to a staggering 8.6% as prices of almost every good and service in the economy remain stubbornly elevated.  Demand for many goods and services (including energy and food) seems to be holding strong, but many are worried that wage growth will wane as layoffs (especially in the tech sector) increase, will lose any semblance of staying power to offset price hikes and, eventually, the US consumer will struggle to stay above water.

Prices of gas at the pumps are hitting all-time highs on a daily basis, groceries and food costs are skyrocketing, food shortages are threatening families, the cost of shelter (that is, rent) is soaring, and used autos are still outrageously high (Source: CNCB).  When families have to choose between gas in the car or food on the table, can the Fed actually save the day? 

Next month, the Fed is expected to raise rates again by 50 basis points and continue on that trend of hiking rates for the rest of the year.  But are they behind the curve?  I’ve been saying they are now for almost a year. 

When the current administration cut oil supplies in the US, the price of gas quickly climbed to record levels.  Near the end of 2020, the US was energy-independent and the average price of gas was under $2/gallon.  At the same time, the CPI inflation rate was under 2% at 1.70%.  One, single year later, inflation was nearing 5% and the Biden administration, including Jay Powell and Janet Yellen, remained in denial claiming that inflation was “transitory” and could not get worse or last for a prolonged period of time (Source: St. Louis Fed).

We can’t have a Fed in denial. Here’s your analogy: you have a small leak in the pipes in your kitchen. You see small amounts of water on the tile floor. You dry up the water with paper towels and, in denial, you say that small leak can’t get any worse and should just “fix” itself. 

And now, when up to your knees in water, you suddenly realize that the leaky pipes are a major problem and bold action must be taken – not only to fix a massive plumbing problem, but now, you have to replace the floor, cabinets, and furniture because of all of the ancillary water damage that has been done.  That’s what’s happening with prices. 

As inflation increased by almost 200%, and home prices were still hitting record levels, the Fed maintained its purchases of mortgage-backed securities and kept pressing the accelerator of Quantitative Easing within our economic system as they remained addicted to 0% interest rates.  What would have been wrong with the Fed correcting course because of a 200% spike in inflation?  Yes, if Jay Powell turned hawkish (as he most likely should have) at that time and raised rates to stop accelerating prices, the markets would have taken a hit and economic activity would have slowed down…That said, it is exactly what the Fed is attempting to do as I write this message but they’re taking action now after inflation is up over 400% - behind the curve, anyone?  The Fed’s kitchen is flooding. 

So, what do investor’s do now?  Well, as Capstone’s clients are well aware, we have already taken “cover” by reducing risk in portfolios near the end of 2021 and earlier this year.  In times like these, managing risk in a responsible way will get an investor through bad markets successfully.  As I have said countless times before, we will never completely “outsmart” the markets, we only need the ability to navigate rough waters, manage through volatile times, and make it to the next expansion in the business cycle and inevitable move higher in stocks and capital markets.  The goal is always to create better retirement outcomes which is a process – not a transaction.  That process takes years, not just a few days or weeks to accomplish. 

For all Capstone clients reading this message, as always, please call us with your questions or concerns.  If you have never been a client of Capstone, are worried about risk management in your portfolio, and would like to know more about “better retirement outcomes” please contact us for a no-obligation, no-cost review of your investments and financial plan. 

The advisors at Capstone can be reached at 888-587-7526 (toll-free) or (570) 587-7800 (office-direct). 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.