Chart Talk: The Hot CPI


This morning the Bureau of Labor Statistics reported that retail inflation for the month of June as measured by the Consumer Price Index (CPI) rose a hotter than expected 1.3% m/m and by 9.1% y/y, its highest level since November 1981.  Energy prices jumped 7.5% m/m and by 41.6% y/y while food costs rose 1.0% y/y and by 10.4% y/y.  As we have recently noted within our Weekly Snapshot, “we are still of the mind that this inflationary cycle is slightly more secular than transitory as we believe elevated energy prices (perhaps not at this level, but higher as compared to the past two decades) are here to stay as are higher wages. The impact of permanently higher wages will be felt more severely in the United States than in developing countries as we are a service economy. That said, we do expect wages to plateau shortly as the workforce reappears, having spent their COVID windfall”.  As you can see from the chart below, commodity prices and producers have all been hit sharply over the past 3 months, signaling that some inflationary pressure might be starting to wane.  These could be early signs that the Federal Reserve’s effort to reduce demand is having an impact.

Given the larger than expected increase in the CPI, investors will be interested in what the Fed has to say at the conclusion of their meeting in a couple of weeks.  We believe traders have fully priced in a 75 bp rate hike.  However, we would not be surprised if a 100 bp rate hike is on the table.  

We are anxiously anticipating the upcoming corporate earnings season, paying close attention to any slowdown in demand during the second half of the second quarter, downward revisions to forward guidance, any impact from the disruption in the supply chain or the appreciating dollar, as many companies within the S&P 500 derive more than 50% of their revenues outside the United States.  We remain cautious over the short-term and optimistic as the year wanes, noting within our Weekly Market update that “our base case currently is for investors to expect volatility and perhaps more downside to the tune of five to ten percent, especially over the first half of the third quarter. However, as the quarter rolls on, investors will begin to focus on the opportunities within the financial markets rather than the risk thereby setting a floor and allowing them to proceed higher, albeit in an uneven fashion.”  

All information is as of the market close on July 12, 2022. Please note that all data is for general information purposes only and not meant as specific recommendations.  The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein.  Securities contain risks and fluctuations in principal will occur.  Please research any investment thoroughly prior to committing money or consult with your financial advisor.  Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients.  Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call 518-279-1044.

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