After more than two years of rising prices, it appears that inflation is slowing – finally. There is no doubt that higher prices for groceries, gas, and housing have had a negative impact on our wallets, yet the economy has not been crippled. Job gains have been strong and positive GDP estimates continue to rise. But don’t celebrate yet.
Between the summer swoon and fall drop, the markets have had numerous false starts. The cost of believing the markets will move higher versus what is actually happening is expensive. I constantly warn traders against trying to jump ahead. Markets discount the news to get ahead of the conditions, both good and bad. But the stubborn situation we are in remains troubling.
Our country has not faced high inflationary conditions for more than 40 years. If you remember your US history or economics class, interest rates rose to dramatic levels. Inflation eventually came down, but with it came high unemployment conditions and weakened demand. It was as if the economy needed a do over. As painful as it was to restart the economy, the ensuing prosperity carried well into the next century.
Last week we finally saw a decline in prices when the CPI came in slightly lower than expected. That reading induced a roar from the crowd and a furious buying spree that we had not seen in over two years. The remarkable rally spread to many sectors and lifted stocks higher. It may signal a change in the trend, but I am cautious about letting my guard down in this vicious bear market.
Even if inflation is slowing and prices are starting to decline, the year over year numbers are troubling. The Fed crafts their monetary policy on those numbers. More interest rate hikes are coming and rates will stay elevated for a longer stretch of time (into 2024). The peak rate may not hit 6%, but anything above 5% will be a high hurdle for companies to jump over. We are unlikely to see rates fall below 3% for a long time, if ever again.